Each investor has a unique risk capacity and can be identified by a risk capacity
score, a measure of how much risk an individual can manage. This score is based
on five specific risk dimensions of an investor.
The Five Dimensions of Risk Capacity
- 1) Time horizon and liquidity needs
- 2) Attitude toward risk
- 3) Net worth
- 4) Income and savings rate
- 5) Investment knowledge
Risk capacity can be regarded as a measurement of an investor’s ability to earn
stock market returns. Calculating risk capacity is the first step to deciding which
portfolio will generate optimal returns for each investor. A risk capacity score
determines the proper risk exposure for an investor’s portfolio.
Risk Capacity Survey
An easy and efficient way to determine an investor’s risk capacity is to complete
a questionnaire or survey that evaluates and quantifies each of the five dimensions
of risk capacity.
Higher scores signify a higher capacity for risk, a longer time horizon and an ability
to withstand market volatility. Investors with higher scores are generally recommended
to hold portfolios with a larger allocation of global equities. In contrast, lower
scores signify a lower risk capacity and a higher need for liquidity. Investors
with lower scores are steered toward more conservative portfolios that hold a higher
proportion of short-term investments such as fixed income.
What's your Risk
Capacity? Find out right now when you take the simple 5-minute survey.
It will lead you to one of the ten IFA Index Portfolios IFA has built for 401(k) plans.
Click here to take the Risk Capacity Survey to find out which is the right portfolio for you »