Unit 1 · Level 2 · What risk really is
Wallet facts vs stomach facts
Risk CAPACITY is about your money: how long until you need it, how stable your income is, whether you have an emergency fund. Risk TOLERANCE is about your stomach: can you watch −30% without hitting the sell button? Capacity is measured in spreadsheets; tolerance is measured at 3 a.m. during a crash. A good plan respects both gauges.
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What you get asked
Match each fact to the gauge it moves
Time horizon and income stability are money facts. How you actually behaved in past crashes is the most honest stomach fact you own.
Which of these is a risk CAPACITY fact, not a tolerance one?
An emergency fund means a market crash won't force you to sell. That's objective financial capacity. The other three describe feelings, which is tolerance territory.
Marta LOVES risk but needs her €20,000 for a house deposit in two years. What should drive her decision?
Stocks can easily still be down 30% two years from now, and she can't wait it out. Enthusiasm doesn't extend deadlines. Capacity caps what tolerance may spend.
When capacity and tolerance disagree, let the ___ of the two set your risk level.
Exceed your capacity and a crash forces you to sell; exceed your tolerance and panic makes you sell. Either way you lose, so the weaker gauge sets the limit.
Why do risk-tolerance questionnaires often mislead people?
Everyone is risk-tolerant in a bull market. Your behaviour in the last real drawdown (or a deliberately cautious guess if you've never had one) beats any sunny-day quiz. 🐜
The rest of this unit
Swings, crashes, and stomachs: telling temporary pain from permanent damage.