EP Wealth’s Regional Director, Cannon Carr, explains how financial plans can reflect individual risk preferences. Learn how investors can be aware of taking on too much or too little risk for their situation. 

How to Tailor Financial Plans for Your Risk Preferences

Most investors’ reactions to risk are driven more by emotion than by objectivity. Some people are strongly averse to risk, and others consistently seek it out. Either way, they’re responding from an emotional impulse that is often deeply ingrained. A financial advisor’s role is to bring an objective perspective, helping tailor a financial plan that’s aligned with your true financial capacity to accept risk, rather than perceptions that may be distorted by fear or wishful thinking.

The goal is balance: you don’t want to take on more risk than your financial situation can handle, but you also don’t want to leave opportunities untapped because the portfolio is more conservative than your income stability, time horizon, and resources might justify.

Can You Pass the Sleep at Night Test?

When I talk to clients about risk, I often ask one simple question: Can you pass the “sleep at night” test? If your investments or financial plan are keeping you awake with worry, something is off. The plan isn’t aligned with your true tolerance for risk.

Risk, in this context, means the potential for loss or volatility. Those are the things that keep people awake at night. If your plan is well-matched to your tolerance, you’ll feel comfortable enough to rest easy. That’s the first part of my philosophy.

The second part is to write it down. Even if it’s just a one-page document, outline your goals, your timelines, and what risk means to you. Ask yourself: What’s important to me? What does loss look like? At EP Wealth, advisors can help create fully written plans with action steps, but it starts with you. Writing it down makes your plan more concrete and easier to revisit each year as your life evolves and your sleep-at-night threshold shifts.

Avoid Acting on Impulse

One of the biggest challenges investors face is the urge to act impulsively. Markets rise, and euphoria pushes people to chase gains. Markets fall, and fear drives people to sell at the worst possible moment. A sudden life event can also trigger hasty decisions.

The problem with impulsive reactions is that they often lock in losses. For example, buying late in a market rally due to excess enthusiasm means that if the market crashes, you’ll likely have bought high and sold low.

That’s why I encourage people to pause. If you feel a strong urge to make a quick move, slow down. Sleep on it and reassess tomorrow. Sometimes a single night’s pause is enough to shift perspective. This technique sounds simple when you say it, but it is a lot harder to actually put into practice in the heat of the moment. It's worth making the effort, though, as it can be one of the most effective ways to keep emotion-driven mistakes out of your financial plan.

Where Do You Fall on the Risk Spectrum?

It’s a mistake to assume someone’s wealth level determines their risk tolerance. In reality, even among very wealthy people, attitudes toward risk vary widely. Some entrepreneurs build wealth conservatively and remain cautious throughout life. Others embrace risk regardless of financial security. Human nature doesn’t necessarily change just because financial circumstances do.

That’s why it’s so important to understand where a client falls on three distinct spectrums:

1. Risk tolerance profile – Do you have a fear of loss and volatility, or do you seek risk?
2. Conviction profile – Are you deferential and seeking reassurance, or highly confident and controlling?
3. Decision-making style – Do you make decisions quickly and emotionally, or slowly and cautiously?

Together, these dimensions reveal how someone is likely to respond when faced with risk in real-world situations. 

How Advisors Create a Risk Profile

To understand a client’s risk profile, advisors at EP Wealth look at three factors: psychology, financial capacity, and past behavior.

1. Psychology: Risk questionnaires and ‘what if’ scenario testing help reveal attitudes toward gains, losses, and volatility. For example, we use tools that can show a client what their portfolio would look like if the market dropped 30% and see how they would respond. Visuals help make this exercise more realistic, with declining portfolio values in red and rising numbers in green to enhance the simulation.
2. Financial capacity: Beyond psychology, we analyze the client’s actual ability to handle risk. Key factors include their investment horizon, income stability, liquidity needs, and any major financial obligations. For example, someone saving for retirement with a long time horizon and steady income may have a very different capacity than someone who needs to fund college expenses in a few years or provide care for aging parents in the near term.
3. Past patterns of behavior: Perhaps the strongest indicator of risk tolerance is how someone has acted in the past. Did they sell in panic during the last downturn, or did they ride it out calmly? Real-world behavior often tells us more than hypothetical reactions.

Example in Practice

During scenario testing with a client, I noticed that he became visibly anxious during simulated market drops. His psychological profile suggested strong risk aversion. Yet, looking at his history, he had comfortably invested for more than a decade, including during the COVID downturn, without making impulsive moves. His financial capacity was also strong. Taken together, this indicated he could tolerate more risk than his initial reaction suggested. Recognizing that helped him gain confidence in a more accurate assessment of his risk profile.

Tailoring Financial Strategies to Risk Profile

Once a risk profile is established, we shape the financial plan along three dimensions:

1. Asset allocation and investment strategy
2. Time frame and horizon
3. Investment product features

For someone who is risk-averse, the portfolio may tilt toward fixed income rather than equities, emphasize yield and tax-sensitive strategies, and have shorter time horizons. The focus is on reducing surprises.

For a more risk-tolerant investor, the allocation may lean toward equities or other growth-oriented assets, with a longer horizon in mind. For ultra-wealthy individuals whose current needs are already covered, investments can be structured with a legacy focus, allowing for a higher level of risk.

Risk Mitigation Strategies

Even with a tailored plan, risk needs to be managed. Three different approaches can help maintain alignment between risk tolerance and strategy:

1. Diversification and rebalancing – Spreading investments across asset classes helps manage volatility. Rebalancing keeps the portfolio aligned with original targets. For example, if a 60/40 stock-bond mix shifts to 80/20 after a market rally, rebalancing brings it back in line.
2. Buckets by purpose – Segmenting assets into short-term, medium-term, and long-term “buckets” helps match risk to purpose. Cash reserves may be held conservatively in the short term, while long-term growth can be pursued more aggressively. This structure also makes it easier to stay disciplined during volatile markets. When you know your near-term needs are covered by the short-term bucket, you’re less likely to feel pressure to sell long-term investments out of fear.
3. Glide path through the life cycle – Needs change over time. Early-career investors may have the flexibility to take more risk, while mid-life obligations like raising a family and paying for a home often call for more balance. In retirement, portfolios typically become more conservative. Adjusting along this glide path helps keep the plan aligned with life stages.

The Value of an Advisor in Helping Manage Risk Preferences

Advisors play two especially important roles when it comes to tailoring financial plans for risk preferences:

1. Making the abstract concrete – Concepts like “risk tolerance” or “volatility” can feel abstract. An advisor translates them into concrete strategies and examples that directly reflect a client’s reality.
2. Serving as a sounding board – In times of stress and decision-making, an advisor’s role is to listen, provide an objective outlook amid the emotional noise, and remind clients of the reasoning behind past planning decisions. That might mean encouraging patience for a client whose instinct is to take control and make quick decisions. Or it could mean reassuring a highly cautious client by pointing back to the protections already built into their plan.

Ultimately, an advisor’s job is to help you fashion a plan that passes the sleep at night test. When your financial strategies are balanced with your goals, resources, and risk profile, you are better positioned to stay the course with confidence, no matter how markets or life circumstances shift.

If you're ready to build a financial plan that helps you sleep better at night, our advisors are here to help. Connect with us today to start crafting a strategy tailored to your life, goals, and long-term vision.

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