To be clear, risk capacity is not the same as risk tolerance. How much risk you can afford to take is not the same as how much risk you are comfortable taking. Risk tolerance is psychological: How comfortable am I with uncertainty or the possibility of losing money? Risk capacity is financial: How much risk can I actually take without seriously damaging my financial position if things go wrong? For example, someone may be naturally entrepreneurial and completely comfortable with the idea of quitting their job to start a business. That's high risk tolerance. But if they have $2,000 in savings, significant debt, three children and are the family's sole income earner, they may have very low risk capacity. Conversely, someone with $1 million invested and no debt may have enormous capacity to take financial risks but personally hate uncertainty. That's high risk capacity and low risk tolerance. This distinction is important because someone choosing not to take a financial risk isn't necessarily afraid of risk. They may simply not be able to afford the consequences of being wrong. This is where money creates an advantage. Financial security doesn't just protect you from risk. It increases your capacity to take it. That can create a feedback loop: Financial margin → greater risk capacity → access to higher-upside opportunities → potentially greater wealth → even greater risk capacity. The reverse can also be true. When you have very little financial margin, choosing the safer option may be completely rational because the consequences of being wrong are much greater. So it's not always as simple as telling people to take more or less risk. That advice doesn't always land because it ignores the individual's financial circumstances. The better goal is to build enough financial margin that you can afford to take smart, calculated risks when the right opportunities arise. Has building financial security changed the kinds of risks you're willing to take?
1,352 views
15 Comments
Moe
@moementumfinance · 8d
Love this post! Reminds me of similar lessons I have learnt from @mr.financial and his videos. Thanks @moneymeetslegacy for posting these important educational contents.
Michael Conroy
@conroy119 · 8d
Yes building a financial baseline, like a steady income and a stock portfolio has increased my willingness to take risk. Risk tolerance is an interesting concept. You don't really know your tolerance until you've tested it. Its easy to claim you have 10/10 risk capacity and tolerance. 2022 tested my tech heavy portfolio a bit. It doesnt feel good experiencing drawdowns. But having the knowledge to rationalize those negative feelings is key during drawdowns. Let's just hope we don't have another lost decade... that wouldn't be fun lol.
Matt @tissuet · 7d
Risk on for meeee
Sarah Giver
@staystronggiver · 8dEdited
I love this post Nicole, excellent 👌🏽. I feel like you explain the nuances so well. I also feel this is especially relevant in communities of colour where money is commonly sent overseas to support families back 'home' or parents here in the case of first gen immigrants hence an (unfortunate) reduced capacity to take risks even before children enter the picture.
See the full comment section 👀Sign up for the full Blossom experience!
