The Difference Between the Risk an Investor Is Willing to Take and the Risk They Should Take Is Not Academic—It’s the Difference Between Checking Boxes and Delivering Truly Suitable Solutions
According to Oxford Risk, for many years, advisers and firms have relied on some version of what is often called Attitude to Risk (ATR) as the main— and in many cases, the only—criterion for portfolio selection. However, they believe that ATR was never truly fit for purpose. “It provided an easy number to anchor to, but not a complete picture. It only captures part of what we need to know about an investor, and often not even that particularly well,” the firm argues.
Oxford Risk’s approach begins with a simple premise: the amount of investment risk an investor should take—their Suitable Risk Level (SRL)—must be based on a more complete understanding of who they are and how they relate to their investments. This requires moving beyond a narrow focus on a single attitude and instead considering a combination of key factors:
Risk tolerance, understood as a long-term psychological trait that reflects how much risk an investor is willing to take in relation to their total wealth;
Risk capacity, representing their financial ability to take on risk, considering time horizon, dependency on assets, income stability, and liquidity needs;
Behavioral capacity, referring to their emotional strength to tolerate market volatility, expressed in traits like composure; and finally,
Knowledge and experience, which help assess the investor’s familiarity with the investment world and may temporarily limit their exposure to risk.
Each of these components plays a distinct and complementary role in constructing the investor’s SRL.
The Limits of “Attitude” Toward Risk
The term attitude to risk conceals significant complexity. Each investor has multiple attitudes toward risk: long-term and short-term; rational and emotional; domain-specific and general. What matters is not how a person feels about risk today or in response to recent events, but their stable, long-term willingness to balance risk and return across their total wealth over time.
This is precisely what a well-designed risk tolerance assessment should measure. But market RTA tools often fall short: they confuse risk tolerance with optimism, confidence, or knowledge; they fail to isolate the core trait; and they produce unstable results that may change drastically with the markets.
Moreover, ATR—even when well-measured—is only part of the story. Most tools that use ATR completely ignore risk capacity, and with it, the dynamic life context of the investor’s financial situation. In their view, risk tolerance tells us how much risk people are willing to take; risk capacity, how much they can afford to take. “Ignoring the latter can cost decades of compounded growth and lead to very unsuitable long-term outcomes. Suitable risk isn’t what feels safe today, but what supports financial security over time,” they note.
From Investor to Portfolio
At Oxford Risk, they believe that understanding the investor is only half of the equation. “Assigning them the right portfolio also requires knowing the long-term risk level of that portfolio. This is where another mismatch often arises. Too often, portfolio risk is assessed using short-term historical volatility—a highly unstable and context-dependent measure. This leads to inadequate risk labels and poor long-term alignment,” they state.
In their view, what’s needed is stability on both sides: a stable measure of the investor’s SRL, based on proven traits and models over time; and a stable measure of portfolio risk, based on expectations of long-term outcome uncertainty. “Only if both conditions are met can we ensure that the risk match is accurate at the time of recommendation and remains appropriate as both markets and personal circumstances evolve,” they affirm.
Their key conclusion is that attitude to risk was a useful stepping stone, but it is no longer sufficient (indeed, it never truly was). “A truly suitable level of risk must combine: a precise, psychometric measure of risk tolerance; a forward-looking, situational awareness of risk capacity; a behavioral understanding of composure and its effect on behavior; and an appreciation of knowledge and experience and their role in informed decision-making,” they argue.
In their view, only in this way can we deliver investment solutions that align not only with what an investor says or feels, but with who they are, where they are in life, and the best way to support their long-term goals. “Suitability is not a number. It is a relationship (between investor and investment) based on understanding, adapted over time, and empowered by technology that embeds science into every recommendation,” they conclude.
