The difference between the risk an investor is willing to take and the risk they should take isn’t academic – it’s the difference between box-ticking and delivering truly suitable solutions.
For many years, advisers and firms have relied on some version of what is often labelled "Attitude to Risk" (ATR) as a primary – and in many cases sole – input for portfolio selection. But ATR was never truly fit for purpose. It provided an easy number to anchor on, but not a complete picture. It captures only one part of what we need to understand about an investor – and often not even that particularly well.
Oxford Risk’s approach starts with a simple premise: the amount of investment risk an investor should take – their Suitable Risk Level (SRL) – must be grounded in a fuller understanding of who they are and how they relate to their investments.
That means going beyond a narrow focus on a single attitude, and instead combining:
- Risk Tolerance – the long-term psychological trait reflecting how much risk an investor is willing to take over their total wealth.
- Risk Capacity – their financial ability to take risk, based on time horizon, reliance on assets, income stability, and liquidity needs.
- Behavioural Capacity – their emotional ability to handle market volatility (proxied by traits such as Composure).
- Knowledge & Experience – a more objective gauge of how familiar the investor is with investing, which can constrain risk temporarily.
Each of these components plays a distinct and complementary role in building up the investor’s Suitable Risk Level.
The Limits of “Attitude” to Risk
The term “Attitude to Risk” conceals complexity. Every investor has multiple attitudes to risk – long-term and short-term; rational and emotional; domain-specific and general. What matters is not how someone feels about risk today or in response to recent events, but their long-term, stable willingness to trade off risk and return across their total wealth over time.
This is precisely what a well-designed Risk Tolerance assessment should measure. But ATR tools in the market often fall short, confusing risk tolerance with optimism, confidence, or knowledge; failing to isolate the core trait; and producing unstable outputs that can shift dramatically with markets.
Moreover, ATR (even when measured well) is only one part of the story. Most tools using ATR ignore Risk Capacity entirely – and with it, the vital, dynamic context of the investor’s financial situation.
Why Risk Capacity Matters: A Practical Illustration
Imagine an investor who scores low on Risk Tolerance – they are psychologically uncomfortable with taking on investment risk, and left to that single measure, would be matched to a low-risk portfolio. That might seem safe.
But now add some context. This investor is young. They have a good education, a well-paying job, are spending far less than they earn, and have decades of saving and compounding ahead of them. Their human capital – the value of their future earnings – is high, and they are still in the early stages of wealth accumulation.
To suggest this investor should be placed in an 80% bond portfolio for the next 40+ years, simply because they are emotionally cautious, is clearly misguided. Their Risk Capacity – the financial ability to take risk, based on time horizon, income, and reliance on investment assets – is high. And it must be factored in alongside Risk Tolerance to reach a Suitable Risk Level that is truly appropriate for their total wealth.
Risk Tolerance tells us how much risk they’re willing to take; Risk Capacity, how much they can afford to. Ignoring the latter can cost decades of compounded growth – and result in deeply unsuitable long-term outcomes.
Suitable risk is not what feels safe today, but what supports financial security over time.
Measuring Suitable Risk: Dynamic Inputs, Stable Output
In our system, SRL is not a subjective judgement or arbitrary label. It is a model-driven synthesis of all four factors, combining the stable psychological traits of Risk Tolerance and Composure with the more dynamic inputs of Capacity and Knowledge.
Risk Tolerance and Composure change slowly over time. Risk Capacity is more fluid – most notably during the transition to retirement, where the end of regular earnings and the onset of drawdown increase sequencing risk – the risk of withdrawing during a downturn – and reduce financial resilience.
This is why dynamic risk profiling is vital. SRL needs to be reassessed over time, especially when investor circumstances shift. Our tools track those shifts, so advice stays suitable across the investment journey.
Our data show that only about 40% of the time does the Risk Tolerance score (or its equivalent ‘attitude to risk’ measure) align with the final Suitable Risk Level (SRL) once other essential factors are included. In other words, if you only rely on Risk Tolerance, you’ll recommend an inappropriate portfolio 60% of the time. This is not because the Risk Tolerance measure is wrong—it remains a vital component—but because it’s only one piece of the puzzle. A robust SRL must also account for the investor’s Risk Capacity, Behavioural Capacity (typically measured via Composure), and their Knowledge & Experience.
Figure 1. Difference of SRL from Risk Tolerance
From Investor to Portfolio: A Question of Measurement
Understanding the investor is only half the equation. Matching them to the right portfolio also requires knowing the long-term risk level of that portfolio.
This is where another mismatch commonly arises. Too often, portfolio risk is assessed using short-term historical volatility – a highly unstable and context-dependent measure. That leads to inappropriate risk labels and poor long-term matching.
What’s needed is stability on both sides:
- A stable measure of the investor’s SRL, grounded in traits and time-tested modelling.
- A stable measure of portfolio risk, based on forward-looking expectations of long-term outcome uncertainty.
Only with both of these in place can we ensure that risk-matching is accurate at the point of recommendation, and remains appropriate as both markets and personal circumstances evolve.
Seeing the Journey: Risk Over Time
To illustrate the value of a dynamic approach, consider two snapshots of the same investor: one in early accumulation, the other in retirement.
In early accumulation, their high earnings, long horizon, and low reliance on investments for spending give them high Risk Capacity. Combined with moderate Risk Tolerance and Composure, this justifies a high Suitable Risk Level – supporting long-term growth.
In retirement, Risk Tolerance and Composure are unchanged, but earnings have ceased, and drawdown has begun. The investor now faces sequencing risk, making them more reliant on their investment portfolio to meet spending needs. Their Risk Capacity has dropped. And so, their Suitable Risk Level falls.
This is suitability done properly: dynamic when needed, stable when it matters.
The Bottom Line
Attitude to Risk was a helpful stepping stone – but it's no longer enough (indeed, it never really was). A truly Suitable Risk Level must combine:
- A precise, psychometric measure of Risk Tolerance.
- A forward-looking, situation-aware measure of Risk Capacity.
- A behavioural understanding of Composure and its effect on behaviour.
- An appreciation of Knowledge & Experience and its role in informed decision-making.
Only then can we deliver investment solutions that are aligned not just to what an investor says or feels, but to who they are, where they are in life, and how best to support their long-term goals.
Suitability isn’t a number. It’s a relationship – between investor and investment – built on understanding, tailored over time, and powered by technology that embeds science into every recommendation.
Article originally published in Portfolio Adviser on 09/04/2025.
