Risk capacity

Risk capacity describes an investor's purely objective financial resilience. It indicates the losses an investor can actually withstand without jeopardizing their accustomed standard of living or compromising the achievement of long-term goals (such as retirement provisions). In contrast, risk tolerance refers to emotional composure in the face of price fluctuations. People often talk about risk appetite, which is a purely subjective measure.

Three factors play a role in risk capacity: the investment horizon, net assets, and income stability. Young people who will not need to rely on their capital for another 30 years have a high risk capacity, as the time factor allows them to sit out temporary market slumps. A high fixed income or substantial reserves also increase this leeway.

A classic mistake in investment advice is to confuse risk capacity with risk appetite. Even if someone is extremely courageous, they should not make risky investments if they have limited reserves and a short time frame. Risk capacity thus forms the guidelines within which the investment strategy can safely operate.