A client says she can emotionally tolerate a 30% portfolio decline, but she needs the money in 18 months for a home down payment and has no other savings. What should the planner conclude?
A.
Her high tolerance automatically supports an all-equity portfolio.
B.
Her investment experience is the only relevant factor.
C.
Her risk capacity is low despite her stated tolerance.
D.
Her tax bracket determines that equities are required.
The planning distinction is between risk tolerance and risk capacity. Risk tolerance is the client’s psychological comfort with volatility. Risk capacity is the financial ability to withstand loss without jeopardizing a goal. Here, the funds have a short, specific time horizon and no substitute source. A 30% decline shortly before the home purchase could make the goal impossible. Option A confuses willingness with suitability. Option B is incomplete because experience matters, but goal timing and liquidity dominate this case. Option D is irrelevant to the core issue; taxes do not override capital preservation when funds are needed in 18 months. A course-guide analysis would recommend a liquid, low-volatility vehicle such as a high-interest savings account, short-term GIC ladder if timing allows, or money market-type solution, depending on guarantees and access. The planner must document why the client’s emotional tolerance does not justify exposing goal-critical capital to equity volatility. References/topics: risk capacity, time horizon, liquidity, goal-based investing.
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