Why Your Risk Tolerance Score Doesn’t Tell the Whole Story

Often, one of the first things an investor will do when meeting with an advisor is to take a risk tolerance assessment or questionnaire. You’ll fill out a few questions about your attitudes toward risk and your comfort with volatility, and you’ll receive a “risk tolerance score,” intended to indicate how much risk—or equity exposure—you should have in your portfolio. These short surveys can be useful starting points, but they don’t tell the whole story.

What Your Questionnaire Captures—And What It Misses

What it captures:

• How you emotionally react to risk (Do you worry when markets drop? Do you prefer stability, even if it means lower returns?)

What it misses:

• Time Horizon: How long until you need this money? Longer time horizons typically allow for more investment risk.
• Risk Capacity: How much risk can your financial situation handle? If your day-to-day finances are secure, your portfolio can afford more short-term volatility.
• Portfolio Purpose: Is this money for retirement in 30 years? A home purchase in three years? A legacy gift? Your unique goals call for a unique approach.

It’s Not Just About Risk Tolerance—It’s About the Whole Picture

When we work with clients to build investment portfolios, we rely on your comprehensive financial plan to guide us. That plan helps us understand three key factors:

• Risk Capacity: This reflects how much risk your financial situation can handle. Your income, savings, and time horizon all contribute to your risk capacity.
• Risk Tolerance: This measures how comfortable you are with market ups and downs. It’s a psychological and emotional factor that varies greatly from person to person.
• Risk Needed: This is the amount of risk required to achieve your financial goals. It’s calculated based on your investment objectives and the level of return needed to meet them.

Risk capacity is grounded in objective facts—how strong your financial foundation is, how much flexibility you have, and how long until you need to use the money. Risk tolerance is more subjective, reflecting your personal comfort with uncertainty and volatility. Risk needed is purely mathematical—it’s the level of risk your portfolio must take on to give you a realistic chance of reaching your goals, whether that’s retirement, a home purchase, or leaving a legacy to your heirs or charitable beneficiaries.

Together, these three factors form the framework for your investment strategy—balancing what you can, want, and need to risk.

The Power of Time Horizon

One of the most important factors in building your portfolio is your time horizon—how long until you need the money.

If you don’t anticipate touching your funds for decades, you have a long time horizon. That allows you to take on more risk because you have time to recover from short-term downturns.

For example, history shows that stocks tend to outperform bonds over long periods. That’s why portfolios with longer horizons often lean more heavily on stocks—they provide the best chance for long-term growth.

One client recently completed a risk questionnaire and received a score of 48—suggesting they adopt a conservative portfolio with 40% stocks and 60% bonds. But the portfolio in question involved gifted funds the client doesn’t expect to use for at least 20 years. In this case, a more growth-oriented allocation—like 80% stocks / 20% bonds or even 100% stocks—made more sense. Why? Because history shows that over longer periods, stocks significantly outperform bonds. Short-term volatility may feel uncomfortable, but over decades, it’s that higher stock exposure that increases the chances of reaching your financial goals. In this case, the long time horizon meant there was plenty of time for that client’s portfolio to weather market ups and downs in exchange for greater long-term growth potential.

The Hidden Risk of Being Too Conservative

Choosing a conservative portfolio might feel safe today, but it comes with a hidden cost: lower long-term returns.

For investors with long time horizons and strong financial foundations, taking too little risk can actually increase the risk of falling short of your goals—especially when inflation and rising costs are factored in.

How We Actually Build Your Portfolio

If we built your portfolio based only on your questionnaire score, you might end up with an investment mix that feels comfortable in the moment but doesn’t maximize your long-term success. That’s why our approach always goes deeper, combining your financial reality, your goals, and your personal preferences to arrive at the right strategy for you.

Instead of relying solely on a questionnaire, we blend:

• Your risk tolerance score (how you feel about risk)
• Your time horizon (when you’ll need the money)
• Your risk capacity (your financial flexibility and strength)
• The purpose of the portfolio (retirement, legacy gift, future purchase, etc.)
• Insights from our Investment Strategy Group (ISG), which monitors markets and recommends portfolio adjustments based on current economic conditions

This full-picture approach ensures that your portfolio reflects both your comfort level and your long-term goals.

Education First, Always

If you’ve ever seen us recommend more stocks than you expected, this is why. We believe education is key, and empowers you as an investor. Our job isn’t just to build a portfolio—it’s to help you understand why a particular allocation makes sense for you. That way, you’re not just investing based on your feelings today—you’re investing with confidence in your future.

Let’s Review Your Portfolio

If you’d like to revisit your current allocation—or if you want a refresher on how your portfolio supports your goals—we’re always happy to have that conversation.

After all, successful investing isn’t just about how much risk you can handle today—it’s about how much risk you can absorb to confidently reach your goals tomorrow.

Related Reading

• Risk Tolerance vs Asset Allocation: What’s the Difference?

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