Understanding an investor’s emotional ability to handle risk in their portfolio is very different than determining what their actual need for risk may be. Often times if a higher rate of return is required to meet an investor's financial needs, then a riskier portfolio might be required. The investor who needs higher returns will generally have to invest a larger percentage of their portfolio in riskier assets such as stocks in order to generate returns sufficient for their income needs. Conversely, the investor with a lower income need can invest a smaller percentage in stocks, thus taking on less risk in their portfolio.
The distinction between one’s willingness to take risk and need to take risk is critical and a proper assessment of both will go a long way towards an investor reaching their financial goals.