Investment professionals often speak of risk tolerance. It is important for investing but only part of the picture. A person’s risk profile is comprised of three parts: capacity, tolerance, and composure. An individual’s risk capacity is based upon their goals and timeline. A younger person tends to have a higher risk capacity since they have more time to overcome potential adverse events. An individual’s risk tolerance measures their willingness to assume risk for a potentially greater reward. An individual’s
risk composure examines how they respond to times of volatility and change. Mike Tyson somewhat famously said that “everyone has a plan until they get punched in the mouth.” The market has the ability to punch one in the mouth.

Effective risk management will use all three parts to potentially help a client achieve their financial goals
and dreams.