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2. reading the winds
Risk, Return & the Market Seas
Risk is the price we pay for return. Lesson 2 helps you estimate how much risk fits your goals—then shows how that maps to a diversified ETF portfolio.
Every sailor learns to read the wind before raising the sails.
In investing, the “wind” is the balance between risk and return — the invisible force that propels portfolios forward or pushes them off course.
In this lesson, you’ll:
• Learn what risk really means and how it shapes returns
• Explore the factors that define your own risk profile
• See how these profiles align with five model portfolios introduced in the Risk Profile Navigator™ below
• Try guided reflections with our Navigator AI™ Tutor before launching the interactive Risk Profile Navigator™ concluding this learning module
NOTE: You can find the Navigator AI™ Tutor under the Portfolio Explorer menu as "Ask the Navigator"
Chart your course. Discover the models professionals use. Build your own map to financial confidence
determining Your Risk Profile
5 Dimensions
Every navigator needs a chart, a compass, and a sense of direction.
Investing works the same way. Before choosing any model portfolio — conservative, balanced, or growth — you need to understand the five core dimensions that shape your personal risk profile.
These inputs are not about predicting the future. They’re about making sure your portfolio matches who you are, how long you plan to invest, and how much uncertainty you can comfortably handle.
Here are the five factors every long-term investor should understand:
1. Time Horizon (How Long Are You Sailing?)
This is the length of time you expect your money to stay invested before you’ll need it.
- Longer time horizons (10+ years) allow you to hold more equities, because there’s time to recover from storms.
- Shorter time horizons (1–5 years) typically call for calmer waters — more bonds, cash, and lower-volatility assets.
2. Cash Flow Needs (Will You Need Money Along the Way?)
Some investors plan to add money steadily to their portfolios.
Others expect to withdraw funds soon — for retirement, home repairs, or living expenses.
- If you withdraw, your portfolio may need a smoother ride.
- If you contribute, temporary storms matter less, because new cash buys assets at lower prices.
3. Risk Capacity (Financial Ability to Take Risk)
Risk capacity is NOT about emotions.
It’s about math — your income, savings, debts, and ability to absorb losses without jeopardizing essential goals.
Examples:
- A person with a stable income and emergency fund has high risk capacity.
- Someone with unstable income or limited savings has lower risk capacity, even if they feel bold.
Your risk capacity sets the “ceiling” on how aggressive your portfolio should be.
4. Risk Tolerance (Emotional Comfort With Market Swings)
Risk tolerance is about how you feel when markets fall — or rise sharply.
Questions include:
- How would you react if your portfolio dropped 15% in a year?
- Would you stay invested, add more, or feel pressure to sell?
- What level of uncertainty makes you uneasy?
Risk tolerance varies from person to person, regardless of income or age.
We’ll later introduce an interactive app to help you explore your own comfort zone.
5. Investment Purpose (What Treasure Are You Aiming For?)
Your goal shapes your mix of assets.
- Retirement? Long-term, growth-oriented.
- Down payment in 3 years? Short-term, stability matters more than returns.
- Education savings? Moderate time horizon.
- General wealth-building? Flexible, but should still align with your temperament.
Different goals may even call for different mini-portfolios.
Putting the Inputs Together
These five inputs work like coordinates on a map.
Together, they help determine whether you’re better suited for:
- Conservative waters
- Moderate seas
- Balanced exploration
- Growth voyages
- Aggressive expeditions
Below, we map each risk profile to the Traditional Model Portfolios (stocks, bonds and cash) — including an optional real-asset sleeve for added diversification strength.
