From Here to Financial Happiness

Day Fifty Six Fear Factor

When we invest for distant goals like retirement or our toddler's college education, we need to weigh two major risks. First, there's the risk that we invest too conservatively, and end up with modest returns that fail to fend off the twin threats of inflation and taxes. Second, there's the risk that we invest too aggressively and find ourselves petrified by the next large market decline and perhaps even fleeing stocks at the worst possible time.

The second risk is potentially far more damaging. If we freak out during a market crash and sell at fire‐sale prices, the financial cost could be devastating. Yesterday, we looked at your investment experience. Do you have a history of jumping from one investment to the next? If so, you should probably steer clear of individual stocks. Instead, favor mutual funds – especially those that offer broad market exposure – and lean toward a more conservative portfolio.

What if you have little or no experience as an investor? Until you have a better handle on your tolerance for risk, it's wise to err on the side of caution and hold a somewhat more conservative portfolio, perhaps splitting your money between stock and bond funds. If you get a few years of stock market investing under your belt and feel you can stomach more risk, you might increase your allocation to stocks.

• On a scale from 1 to 10, where 10 would suggest you're utterly fearless, how would you rate your risk tolerance?
• On a scale from 1 to 10, where ...