Risk Tolerance

Definition

Risk Tolerance is an investor's long-term psychological willingness to trade-off risk and return. It establishes the investor's baseline Suitable Risk Level.

Higher scores indicate a greater willingness to accept the chances of poor outcomes, in the hope of better long-term returns.

Outputs

Risk Tolerance is usually expressed as a band out of five, from Low to High. However, Suitability Compass can also provide bands out of seven, from Very Low to Very High, if preferred.

Each band comes with a client-facing description:

Risk Band	Description
1/7	Risk tolerance measures your willingness to put your assets into risky investments over the long term. People in this category are highly conservative with their money, and prefer security over the possibility of growth. Investors with very low risk tolerance should keep their money almost entirely in cash deposits, as most standard investment products will be too risky for them, although the most suitable risk profile may also be influenced by their risk capacity.
1/5 or 2/7	Risk tolerance measures your willingness to put your assets into risky investments 2/7       over the long term. People in this category are conservative with their investments, and are unwilling to expose their wealth to much possibility of poor long-term outcomes, preferring to accept lower, but more certain, return. People with low risk tolerance should typically invest in less-risky 'defensive' asset types, with little to no exposure to riskier 'growth' asset types, although the most suitable risk profile may also be influenced by their risk capacity.
2/5 or 3/7	Risk tolerance measures your willingness to put your assets into risky investments over the long term. People in this category are cautious with their investments: they want their investments to grow, but they are reluctant to accept a substantial possibility of poor long-term outcomes. People with medium-low risk tolerance should typically invest mostly in less-risky 'defensive' asset types, with some exposure to riskier 'growth' asset types, although the most suitable risk profile may also be influenced by their risk capacity.
3/5 or 4/7	Risk tolerance measures your willingness to put your assets into risky investments over the long term. People in this category are balanced in their risk tolerance: they neither seek risk nor seek to avoid it, and they are prepared to accept uncertainty in the final value of their investments if it means they are likely to make a decent return. People with medium risk tolerance should typically invest in a balance of less-risky 'defensive' asset types and riskier 'growth' asset types, although the most suitable risk profile may also be influenced by their risk capacity.
4/5 or 5/7	Risk tolerance measures your willingness to put your assets into risky investments over the long term. People in this category are assertive with their investments: they want to grow their wealth over the long term, and are willing to accept the risk of poor outcomes to do so. People with medium-high risk tolerance should typically invest more in risky 'growth' asset types, with less exposure to less risky 'defensive' asset types, although the most suitable risk profile may also be influenced by their risk capacity.
5/5 or 6/7	Risk tolerance measures your willingness to put your assets into risky investments over the long term. People in this category are ambitious with their investments, and they are comfortable accepting the risk of getting less than they wanted if there is a chance of getting much more than they hoped for. People with high risk tolerance should typically invest largely in 'growth' asset types, although the most suitable risk profile may also be influenced by their risk capacity.
7/7	Risk tolerance measures your willingness to put your assets into risky investments over the long term. People in this category are adventurous with their investments: they are focused on long-term growth and are not overly concerned with protecting their portfolios from potentially poor performance. People with very high risk tolerance should typically invest almost entirely in 'growth' asset types, although the most suitable risk profile may also be influenced by their risk capacity.

Risk Tolerance is used to calculate the right level of risk to take with a client's investment portfolio.

You can find information about the consistency check here.