Accounting for an investor's time horizon needs a rethink now that investments are no longer closely tied to singular investment objectives.A specific subset of investible assets may have a time horizon, but the notion of a single time horizon is nonsensical when applied (as it often is) to an investor’s holistic situation. Each investor has multiple time horizons, because they have multiple withdrawal points and multiple goals.Good risk capacity measurements manage time horizons automatically.

Most attempts to measure risk tolerance fail in at least one crucial way, be it confusing the measurement, confusing the audience, or thinking guesswork is a good enough replacement for rigorous psychometric science.The difference between a faulty test and a good one is often in the testing - in scientific terms, how reliable and valid are the items selected for inclusion, and how well does the set work as a whole?Beware of measurements that, mix in traits other than risk tolerance, measure financial understanding, or provide inconsistent, unstable outputs.

A focus on the boxes to be ticked rather than the reasons the boxes exist can lead to laws being followed at the expense of meeting the very outputs the laws are there to produce.Overlooking the spirit of the laws is easy, but dangerous, because it is the spirit that will always be the final judge of whether a course of action is suitable or not.When it comes to assessing suitability, the message you send about what is being invested in is less important than the one the client receives. The focus should be less on acquiring client knowledge, and more on how we use this knowledge that reflect an understanding of what truly matters to investors.

Increased complexity is a cost that the new benefits need to justify. What are the costs and benefits of your cost-benefit analysis? Too often, cashflow modelling introduces additional costs for little to no additional benefit. A cashflow process is not an end in itself.Complex stochastic models still do not tell you what you need to do, what you really want to know, and can inspire misplaced confidence.A simple model that supplements and supports, rather than dictates the terms of, the adviser-client relationship, and that works dynamically to encourage flexible responses to events, not complex predictions of them, is the real sophisticated solution to the cashflow puzzle.

Risk is not about the journey; it’s about where you could end up. It is the risk of money not being there when it’s needed, reflecting both the chance and the severity of poor returns.An investor’s risk tolerance is their willingness to accept the chance of bad final outcomes in the hope of good ones. Risk management is therefore investor-specific, because for an outcome to be bad, it needs to be bad for someone.Risk avoidance isn’t risk management, and forgoing the chance of higher returns is often an excessive price to pay for being more comfortable with short-term turbulence.

Investment plans that ignore, or pay only the whisper of lip service, to investor behaviours, are ultimately futile. Ultimately, the true job of a financial adviser is not to give clients a theoretically ‘optimal' solution, but to give them the best solution they could realise in practice.An investor's feelings are part of an investment's total return. In investing - and in financial decision-making generally - the right thing to do for long-term financial wellbeing is invariably an uncomfortable thing to do.A suitable investment portfolio should be judged not only by whether it could ultimately afford the investor the opportunity to do what they wanted to do when they put the plan in place but also by how the investor felt during the journey, and the costs of all those emotional deviations from the plan along the way.

If you start with high risk capacity, then after a fall in the markets your capacity gets even higher. If you start with low capacity, then lower market values means an even lower capacity. If those changes are large enough, then the risk profile could change enough to justify a portfolio change.If you’re taking withdrawals but happen to have a high risk capacity, you needn’t worry: market falls become an opportunity to increase risk, not something to protect against.Whether the investor is in the position of a market fall being a threat, an opportunity, or a matter of total indifference, the answer to what to do should be systematic: clear, concise, and calculated; it is driven by risk capacity.

If the risk that you’re willing and able to take is not enough to get you to your goals, then any use of ‘risk required’ implies taking more risk than you’re either able or willing to do. This isn't wise.The amount and time horizon of each goal should form part of a comprehensive assessment of risk capacity; an investor’s goals should already be accounted for in any good assessment of the risk the investor is able to take.A high risk required, i.e. a high reliance on growth in one’s investments to meet one’s goals, is actually a sign of low risk capacity, and should logically lead to a reduction in risk. A low risk required may indicate that you don’t need to take as much risk, but equally, it could mean you haven’t fully accounted for how your spending needs and aspirations may change.

Linking investor and investment risk requires putting the two into the same language; common approaches to doing this are not fit for purpose.There cannot be a perfect empirical way of mapping investor risk to investment risk. You cannot link the long-term risk people prefer with the short-term choices they make.We use indifference curves and an available frontier of different levels of portfolio risk to show where the combinations of long-term risk and reward that an investor is equally happy to accept meet the universe of available investment options.

Classical finance asks us to believe the investment journey does not matter. That is a mistake. Ignoring strong intuitions of the investors who have to endure the journey is always a mistake.When we lack comfort with our portfolio, we will act in costly ways to acquire it. And not all of those ways are created equal.Behavioural profiling allows us to predict in which ways we’re likely to make poor decisions, and helps us to avoid them. It helps us to acquire the emotional comfort we need in a cheap, planned, and efficient way.