Risk capacity
Certified Financial Planner glossary · Certified Financial Planner
Definition
The objective ability of a balance sheet and time horizon to absorb volatility without goal failure.
Risk capacity in plain English
A young client with a fat emergency fund and a 30-year horizon can weather a 40% drawdown without missing a house down payment; a retiree taking 5% withdrawals cannot. Risk capacity is that objective ability of a balance sheet and time horizon to absorb volatility without goal failure. It is not the same as how brave someone feels on a questionnaire. When capacity is thin, even a high tolerance score does not justify an aggressive allocation. Size the portfolio to the weaker of capacity and tolerance.
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