investment mistakes to avoid-CONFUSING TOLERANCE WITH CAPACITY
An investor’s risk tolerance is a measure of their temperamental willingness to take on risk, while their risk capacity is their ability to
recover losses if they incur them.
A 35-year-old has a higher risk capacity than a 55-year-old because if the market falls 20 per cent they would not need to increase their
annual return by very much to get back on track. For the older investor, a fall of this magnitude close to retirement may be difficult to
claw back. Unrelated to their risk capacity, either investor may or may not have a high risk tolerance.
If you’re young – and have plenty of time to recover from adverse market moves – you should focus your portfolio on the assets with the
best long-term performance track record: equities. Closer to retirement, when you can’t afford to incur heavy losses, hedge your bets by
spreading your money between different asset classes.