The traditional way the industry evaluates your risk profile is by having you take a questionnaire. The problem with most of these questionnaires, however, is that they only measure your risk tolerance.
A better way
At The Johnston Group, we believe risk tolerance is only part of the picture. Our advisors will also work with you to quantify your risk capacity and risk requirement.
- Risk tolerance is your willingness to take on risk
- Risk capacity is your ability to take on risk without endangering your core financial needs
- Risk requirement is the risk you need to take in order to reach your goals
When designing a financial, savings, and investment plan, all of these risk attributes need to be taken into account, but no simple questionnaire can account for them all. This is why The Johnston Group augments your risk questionnaire results with in-depth, professional planning sessions, designed to help articulate these other aspects of your risk profile. Only when viewing all of these components together can we formulate a clear picture of your unique risk profile.
visualizing your risk profile
Without taking a full assessment of your risk tolerance, risk capacity, and risk requirement, you're at risk of being put into a portfolio allocation that is suboptimal or, in some cases, too risky for your financial situation. Below is an example of a hypothetical investor's risk profile, where risk tolerance, risk capacity, and risk requirement are charted on a scale from less risk to more risk.
In this example, the investor has a high tolerance, or willingness, for risk. However, their risk tolerance exceeds their risk capacity -- their ability to take risk without endangering their portfolio or its principal.
Therefore, the appropriate portfolio allocation would be somewhere near the green checkmark, such that the investor is taking at least the level of risk that's needed to meet their goals (risk requirement), but is also staying within their ability to take on risk (risk capacity). Even though the investor is willing to take on more risk, doing so would be inappropriate because they don't have the capacity take on that risk. Our advisors would recommend that, even though the investor is willing to take on more risk, the investor should only take on the risk that is both required to meet their goals and within their capacity.
Finding Your Risk Profile
Step 1. Use the questionnaire below to determine your risk tolerance. This reflects your personal willingness to take on risk.
Step 2. The Johnston Group analyzes your personal balance sheet and cash flow to determine your risk capacity. This reflects how much risk you can take without endangering your core financial needs.
Step 3. Through a series of personal strategy sessions with our advisors and financial planners, you define your financial goals and needs for the future. With this information, The Johnston Group can determine how much risk you would be required to take on in order to achieve your future financial goals and needs.
Once these three steps are completed, The Johnston Group recommends a portfolio allocation best suited for your unique risk profile, and you can be confident that your saving and investment strategy is aligned with your financial goals and needs for the future.