Determining your risk capacity

In building an investment strategy, your capacity for risk is the first consideration. Your capacity for risk is determined by comparing your future investment cash flows (how much you expect to add to or withdraw from your investments) to the total value of your investments.

The more money you will be adding to your investments, the higher your capacity for risk. Withdrawing money from your investments indicates a lower risk capacity. A comprehensive cash flow projection is the best way to estimate your future cash flow. This does not in itself determine how much risk to take but rather how much risk you can afford to take. Your risk tolerance must also be considered.

The chart below demonstrates the interplay between Capacity and Tolerance in determining your strategy’s risk level.

Once your risk capacity and tolerance are determined, the next step is to set your asset allocation guidelines.  The three broad asset classes we use are:

• Stocks
• Bonds
• Cash

In most cases, we will help you define a range rather than a single allocation for each class.