Investing term
What is Risk capacity?
Your financial ability to absorb losses without derailing your life.
Risk capacity is your actual financial ability to absorb losses without derailing your life — distinct from how much risk you emotionally feel like taking. It depends on your time horizon, income stability, savings, and obligations. Someone can have the stomach for big risk but not the capacity; sound investing respects the lower of the two.
For example
A young saver with a steady job and decades to invest has high risk capacity; a retiree living off the portfolio has low capacity, whatever their nerve.
Risk capacity is taught hands-on in Stage 3 — Know Yourself: Risk Tolerance & Time Horizons.
See the lesson →