Understanding your risk tolerance is one of the most important decisions you’ll make as an investor. At Brown and Company, we view this concept as the foundation for every successful investment strategy. Yet, it’s often misunderstood or oversimplified.
So, what is risk tolerance? At its core, it’s your ability and willingness to withstand fluctuations in the value of your investments. It’s not just about numbers – it’s about your emotional and financial response to market volatility. Some investors feel anxious after a small dip in their portfolio, while others remain calm through sharper declines, focused on long-term gains. This personal variability is what makes understanding your own risk profile so essential.
A well-aligned risk tolerance helps you stay invested when markets shift and makes it easier to stick to your investment strategy over time. Without that alignment, investors may panic during downturns, lock in losses, or miss recovery opportunities altogether.
Knowing how to determine risk tolerance doesn’t mean filling out a quick quiz and calling it a day. It’s a deeper process that involves reflection, planning, and a clear view of your overall financial situation.
Risk Tolerance vs. Risk Capacity
While closely related, risk tolerance and risk capacity are not the same – and both matter in sound investment planning.
Risk tolerance refers to your emotional comfort with financial risk. How would you feel if your portfolio dropped 15% in a quarter? Would you stay the course or consider pulling back? This is subjective and influenced by temperament, life experience, and past investing behavior.
Risk capacity, on the other hand, is objective. It’s a financial measure of how much risk you can afford to take given your current income, assets, obligations, and goals. For instance, someone nearing retirement with limited income flexibility likely has lower risk capacity, even if they have a high personal tolerance for volatility.
Too often, investors rely solely on how they feel about risk without considering what their financial plan can realistically support. At Brown and Company, we guide clients to a portfolio design that balances both tolerance and capacity – because neither should be ignored.
How to Determine Your True Risk Tolerance
Investor questionnaires are a common starting point, but they rarely tell the whole story. To uncover your true risk appetite, we encourage deeper exploration.
Ask yourself:
- How did I feel during past periods of market volatility?
- Am I more focused on growing wealth or preserving it?
- What is my time horizon for needing these funds?
- Could I sleep at night after a large, temporary drop in portfolio value?
Answering these questions honestly provides far more insight than a generic score. It also uncovers inconsistencies between how investors perceive risk and how they might act when faced with real losses.
For example, someone who claims an aggressive risk tolerance might still panic and sell during a sharp correction. In contrast, another investor with a moderate risk tolerance might remain calm, recognizing that short-term losses are part of long-term investing.
This is why guided conversations with a financial advisor are so critical. Our team goes far deeper than basic forms. We help clients uncover the nuances of their investment risk tolerance through thoughtful discussion, scenario modeling, and long-term cash flow planning.
The Brown & Company Approach to Risk
Aligning risk with your goals isn't just a checkbox for us – it's a continuous process of learning, adjusting, and planning with intention.
We take a long-term view. As fiduciary Financial Advisors, we prioritize our clients' best interests above all else. Our risk management process is designed with the goal to minimize surprises and support better investment decision-making across economic conditions. One key goal of our approach is to protect your portfolio with our Retirement Shock Absorber™, which helps buffer against volatility during the most vulnerable phase of a client’s financial life: the transition into and through retirement.
This proprietary framework provides a structured way to manage distribution timing, asset allocation, and income planning – all with the goal of reducing exposure during down markets. It helps investors avoid locking in losses and supports a smoother glide path through economic uncertainty. We also incorporate dynamic tools and ongoing reviews to make sure your portfolio reflects your evolving goals, not just your risk score.
Our process empowers investors to remain disciplined through change and take action with confidence.
Adjusting Risk Over Time
Risk tolerance is not fixed. It shifts over the course of your life, influenced by age, income, life events, and even how markets perform.
Younger investors may naturally have a higher risk tolerance because their investment horizon is longer. They have time to recover from market dips and can often pursue a higher return by taking on more risk. As retirement approaches, investors typically gravitate toward moderate risk tolerance or even conservative risk tolerance, with a focus on income and capital preservation.
That said, not everyone fits the same mold. A well-diversified portfolio for aggressive investors in their 60s may be completely appropriate if their financial situation and risk capacity support it.
We don’t rely on a one-size-fits-all glide path. Instead, we use goals-based planning to adjust portfolios gradually and intentionally. This method keeps your risk appetite aligned with your real-world needs and prevents overreaction to temporary market moves.
Rather than guessing or timing the market, we use cash flow clarity to guide decisions. This allows clients to maintain a stable investment discipline, even as their life stage or financial goals evolve.
Turning Awareness Into Action
Once you’ve identified your risk profile, the most important step is putting it to work – intentionally and consistently. A strong investment strategy doesn’t just reflect your current financial situation; it flexes with your life, your goals, and evolving market conditions. That means applying your investment risk tolerance in a way that’s not only clear today but sustainable tomorrow.
This is where guidance makes the difference. Working with a financial advisor who understands how to balance risk capacity with emotional tolerance gives you the perspective needed to move forward without second-guessing every market swing. Some investors benefit from a higher risk tolerance that supports long-term growth. Others may prioritize stability through a conservative or moderate risk tolerance approach. Neither path is better – only the one that reflects your unique needs.
At Brown and Company, we don’t believe in set-it-and-forget-it risk assessments. We build frameworks that support smarter decisions at every stage, from early accumulation to retirement transitions.
Get personalized risk guidance from Brown & Company, and see how your portfolio can be calibrated to your goals, capacity, and how your risk tolerance shapes investment planning.