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How much investment risk can you really handle?

In this episode of the Plain English Finance Podcast, Tré and Sierra go through a risk tolerance questionnaire together and use it as a way to talk about the psychology behind investing, how advisors measure risk, and why risk tolerance is only one part of the picture.

Tré explains that risk tolerance is more about the emotional and behavioural side of investing, while risk capacity is more about the objective ability to handle market ups and downs. That means someone can have the financial ability to take more risk, while still feeling uncomfortable with it emotionally.

In this episode, we discuss:

- What a risk tolerance questionnaire is trying to measure
- Why risk tolerance and risk capacity are different
- Why some questionnaires feel vague or frustrating
- How financial psychology affects investing decisions
- Why it may matter when and how the questionnaire is presented
- Why advisor influence can affect client responses
- Whether people answer differently once they know more about investing
- Why market experience can shape risk tolerance better than theory
- Why some people have higher risk capacity than risk tolerance
- Why education may help close that gap
- Why personalized questionnaire insights may or may not feel accurate
- How emotions, values, guilt, stress, and safety beliefs can affect money decisions

A good investment recommendation should not be based only on how someone feels about risk. It should also consider whether they can actually afford to take risk.
That is why risk tolerance and risk capacity need to be looked at together.

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