The Three Elements of Risk in Your Financial Plan

Most investors describe themselves as “aggressive,” “moderate,” or “conservative.” While that language is common, it often oversimplifies how risk really works in a financial plan—especially for people approaching or in retirement. In reality, a well-structured plan looks at three separate elements of risk: 1) your risk tolerance, 2) your risk capacity, and 3) your need to take risk to reach your goals.1. Risk tolerance: How much volatility you can live withRisk tolerance is about your comfort level with market ups and downs.Two people can have the same portfolio and the same account balance, yet feel very differently when markets move. One might shrug off a 15% decline as “part of the ride,” while the other loses sleep and feels an urge to sell.If your portfolio is taking more risk than y