Know Your Risk Tolerance Before You Invest a Single Shilling

Risk Tolerance vs Risk Capacity

These are not the same thing:

• Risk tolerance is your emotional comfort with seeing your portfolio fluctuate
• Risk capacity is your financial ability to absorb losses

A good financial plan accounts for both - and they don't always align.

The Three Investor Profiles

Conservative: Prioritises capital preservation. Prefers bonds, money market, fixed deposits. Accepts lower returns for stability.

Moderate: Balances growth with stability. Comfortable with some volatility. Mixed equity/bond portfolio.

Aggressive: Maximises long-term growth. High equity allocation. Can stomach significant short-term drawdowns.

Questions That Reveal Your True Risk Tolerance

1. If your portfolio dropped 30% tomorrow, would you: (a) sell immediately, (b) hold, (c) buy more? 2. How long until you need this money? 3. Do you have other financial resources to fall back on?

Your answers reveal more than any questionnaire - especially question 1, which separates stated from revealed preference.

Why This Matters

Investing beyond your true risk tolerance leads to panic selling at market bottoms - locking in losses and sabotaging long-term returns. The "right" portfolio is the one you'll actually stick with.