skip to main content

What is your financial risk tolerance level?

2021.4.23 Vítor Ribeiro, CFA

Structuring heritage and lifestyle and making decisions based on the various stages of life and the relationship between human capital and financial capital also means knowing how to make good risk management.

In this context, risk management is the process that allows us to anticipate and quantify the potential for losses in a given life plan, financial or not, analyze it and take the necessary preventive measures to reduce, mitigate or transfer the different levels of risk .

In systems like ours, the sustainability of social security is not guaranteed and family support is fragile. Therefore, we must create and establish alternative measures to prepare a more stable future in line with our objectives.

As a basis for analysis, we can start by defining, in general, the different phases we go through throughout life:

  • Foundation, as an initial base in the construction of heritage
  • Accumulation, phase in which income and expense accelerate
  • Maintenance, where heritage preservation is already the most important objective
  • Distribution, stage of transfer and use of heritage to live and maintain a lifestyle.

But, decision-making always means a trade-off between cost and benefit, between risk and return. And for each decision made, we will have to anticipate the potential risks to control and manage them, so that it will be possible to achieve our goals.

The market, for example, is an event that we cannot control, although we think so. Mainly because sometimes black swans (“The black swan”, as Nassim Nicholas Thaleb defined so well) appear as this COVID-19 pandemic.

But if we have goals, if we know our tolerance for risk, and if we have a long-term vision, it will be easier for us to get past the wall of lamentation.




In individual terms, we are exposed to several risks, risks that affect us individually, but also, people depend on us, in the case of a family or organization: the risk related to our potential income. Basically, what we can call financial risk - when we make decisions that jeopardize our income, our savings or even our ability to pay a loan.

There are more stable professions, others that require greater dynamism. The long-term income potential, essential for estimating the savings capacity and for reducing the financial risk, is very dependent on this amplitude. From what we project to gain and what we will actually achieve.

Then we have the risk of premature death. Life insurance is the natural protection against this risk. However, we must look for a secure value that allows us to maintain the financial stability of those who depend on us.

This is an often overlooked problem that can jeopardize family well-being due to lack of planning. Note in the case of a family that depends, in large part, on the income obtained by one of its members. Therefore, we consider that human capital should be seen as an independent asset class such as its importance in the financial well-being of an individual or family.

There is also the risk of asymmetric information, which is the risk related to financial literacy, with moral risk and adverse selection. We must never be at a disadvantage when we have to make investment decisions. We must also be alert to the information provided and the behavior of the various economic agents involved in the process.

Another very common risk is related to real estate or housing risk, commonly known as multi-risk. Damage caused to property can lead to loss or even destruction and often jeopardizes financial stability. The same happens with other risks associated with material goods such as the car or other valuable object.

The health risk is associated with illness or possible accident.

The good news is that a large part of these risks can be transferred to insurance and can be anticipated even if they do not happen, not jeopardizing our long-term plan.

Still within the scope of individual risk, we would like to emphasize the risk of longevity. The risk of living longer than estimated and not having enough assets to maintain the lifestyle and finance all unexpected situations that may arise.

For all these reasons, risk management becomes so essential. It seems like it's always been there and we already do it intuitively. But we emphasize the importance of the risk of premature death and the risk of longevity. By far the most difficult to anticipate and resolve and which are linked to savings and the structuring of a long-term wealth management plan.



What is your risk tolerance level?

Para executar o plano financeiro de longo prazo que nos vai ajudar a gerir alguns dos riscos atrás descritos, precisamos de compreender também a nossa tolerância ao risco. Neste caso, referimo-nos aos vários riscos relacionados com investimento: risco de mercado, risco de liquidez, risco taxa de juro, risco de inflação, risco de crédito e de falência, risco país ou político, entre outros.

O risco objetivo de um indivíduo, ou tolerância ao risco, é definido em função da capacidade e da vontade para tomar risco:

  • Quais são os seus objetivos e necessidades financeiras de curto e longo prazo?
  • Quão importante são estes objetivos? Quais as consequências de não serem atingidos?
  • Qual a perda que a carteira de investimento pode suportar antes de colocar em perigo a capacidade para atingir as principais metas de curto e longo prazo?

capacidade para tomar risco é determinada pelos objetivos financeiros tendo em consideração os recursos disponíveis e o tempo para atingir esses objetivos. Se os objetivos financeiros forem relativamente modestos face ao portefólio de investimento, claramente o investidor tem uma elevada capacidade para tomar risco, para acomodar volatilidade e retornos negativos no curto prazo.

Se a carteira de investimento crescer e se o horizonte temporal aumentar, a capacidade para recuperar de quedas intermédias também aumenta. Tudo o resto constante, objetivos de longo prazo permitem ao investidor considerar investimentos mais voláteis, com o correspondente ganho no retorno esperado. 

Veja-se o exemplo do quadro seguinte, com os cálculos do BofA Global Research, onde um investimento a 10 anos no índice americano S&P500 apresenta uma probabilidade de 6% de obtermos uma rentabilidade negativa. Mas o período for 1 ano, a probabilidade já aumenta para 26%.

Critical objectives allow for a smaller margin of error and reduce the ability to accommodate volatility. Financial security and the ability to maintain the current lifestyle are among the highest priorities of the investor.

Example of an above-average risk-taking ability:

  • Long time horizon;
  • Good health status;
  • Existence of a universal and quality health system;
  • No dependents;
  • Required return on portfolio is low compared to assets and available equity;
  • Other sources of income;
  • Flexibility to leave money or not for descendants or for other purposes.

In contrast to ability, willingness to take risk involves a more subjective assessment. Tracing the psychological profile is fundamental to estimate the willingness to take risk. If you have already experienced situations of large losses and large gains, it becomes easier to have a debate regarding risk tolerance.

At a professional level, if one exercises an independent activity, the risk-taking is in that activity. You demonstrate risk tolerance in your activity because you have a sense of control that you don't have in other areas. A low indebtedness and low volatility policy also indicate a conservative approach to financial investment.



Heritage and risk are dynamic variables. We propose a lifelong financial plan to help investors achieve their goals, including an adequate return on retirement, through a holistic view of their individual financial situation.

We face several risks throughout our lives: we may get sick, have an accident, die prematurely or not have enough resources to maintain our lifestyle. Additionally, from an investment perspective, assets may lose value or not reach the return we need.

These risks represent randomness and may jeopardize our financial independence. Therefore, we must identify them, evaluate them, select the best method to manage them and continue to monitor them for the necessary adjustments.

Vítor Ribeiro, CFA
Vítor Ribeiro, CFA

Vítor is a CFA® charterholder, entrepreneur, music lover and with a dream of building a true investment and financial planning ecosystem at the service of families and organizations.

All articles

+351 939873441 (Vítor Mário Ribeiro, CFA)

+351 938438594 (Luís Silva)

Future Proof is an Appointed Representative of Banco Invest, S.A.. It is registered at CMVM.