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Is Your Risk Tolerance at War With Your Risk Capacity?

What the difference is--and how you can help mend fences.

Christine Benz 24.01.2014

A 23-year-old starts a new job. She remembers her parents griping and worrying about their stock investments during the financial crisis, and knows she too would feel terrible if she saw her hard-earned investing dollars go down in value. She decides to steer her 401(k) contributions to the stable-value fund, which seems to be the safest option in her company's plan.

Meanwhile, a couple of thirty somethings with a second baby on the way are saving toward a down payment for a home that they hope to buy when the lease on their one-bedroom place is up at the end of this year. They were investing in their company retirement plans during the financial crisis and have seen their balances rebound nicely, so they feel comfortable in their ability to tolerate future downturns. They put their down payment money in a global-stock fund, which seems to offer both diversification and the growth potential they seek.

You can probably spot the problems in both of these examples.

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About Author

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

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