Do I Actually Understand My Risk?

I did something to my $600,000 portfolio this morning that made the word risk feel very different.

I’ve been listening to The Income Factory, and there’s a lot of discussion about risk.

Low risk. Medium risk. High risk.

I’ve been investing for almost 3½ years, and I’m realizing there’s a big difference between saying I understand risk and actually seeing what it could look like.

So I put some dollars beside it.

If my $600,000 portfolio drops 20%:

$480,000.

I’ve lost $120,000 on paper.

30%?

$420,000.

That’s $180,000.

40%?

$360,000.

That’s $240,000.

And then there’s 50%.

$300,000.

Imagine I handed you a bag containing $300,000 and said:

“Here you go. Light this on fire.”

I’m guessing you’d have a few questions before reaching for the matches.

Of course, a market drawdown isn’t the same as lighting money on fire.

I still own my investments. It’s a paper loss, and broad equity markets have historically recovered from major declines.

But what if I panic and sell?

Now I’ve turned that paper loss into a real one.

And suddenly the bag and the matches don’t seem quite as ridiculous.

That’s what has me thinking.

Risk can look very different depending on what we own.

A single stock has different risks than owning hundreds or thousands of companies. Dividend stocks can fall. VFV can fall. XEQT can fall. My GICs have different risks again.

Different investments. Different risks. Different potential rewards.

The question isn’t whether I can eliminate risk.

It’s whether I understand the risk I’ve chosen to take.

But there’s one more question that I think matters even more.

What does it do to my plan?

I’m 53. Retirement isn’t 30 years away anymore.

I’m fortunate that I’ll have guaranteed pension income, so a major market downturn doesn’t necessarily mean I’ll have to start selling investments to fund my lifestyle.

But what if I needed that portfolio?

What if retirement was approaching and the $600,000 I was counting on suddenly showed $420,000?

Or $300,000?

Would my plan still work?

I’m starting to think understanding risk isn’t simply being able to say:

“I’m comfortable with a 30% decline.”

It’s being able to say:

I know what could happen.
I know what it could do to my plan.
And I know what I’m going to do if it happens.

Try something.

Take the value of your portfolio today and knock 30% off it.

Look at the dollars, not the percentage.

How does that make you feel?

Now knock 50% off.

And here’s the question I’m really interested in:

Does your plan still work?

6,498 views

44 Comments

Catherine

@ffcatherine · 19d

I’ve been investing about as long as you, started June 2023 when I realized having all my money in GICs after tax I made less than inflation.. not sustainable
So I went all in the stock markets & I seen my portfolio in numbers down 30% a few times as it had put me in USD vs cdn currency (easy way to check how it feels )

It feels horrible.
But the alternative is to not invest which I was doing before which is a silent killer to inflation….

So my plan is this: to know I have enough out of the markets to SURVIVE during an average 2 yr bear cycle… if it’s longer it’ll be tough as I haven’t built up that much yet but once I reach my goal I’ll continue to set aside a small cushion…

Sometimes in life the only choice we have is to be willing to fall & get a few bruises. Since you have a guaranteed pension you’re set …
But anyone like myself without one has to just be willing to live off less during the bad times & sell nothing

The plan isn’t to not feel the FEAR
(Future events appearing real) but to bravely keep up the backup plan & carry on

Mr Financial

@mr.financial · 19d

You essentially described risk tolerance and alluded to risk capacity. Can you AFFORD your portfolio down x percentage points for x period of time. This gets overlooked by many that have a lot of idiosyncratic risk in their portfolio and rely on it for living expenses.

In my personal experience, many men are overly optimistic about their risk profile and ability to manage their portfolio. I lived through 08 as a man in my mid 20s and thought it was great because things were cheap again and I was dumping money into the market every two weeks.... Today, nearing the end of my secular employment... My view of a market being depressed for years doesn't feel good. And i know it shouldn't. Women, like the ones I'm surrounded by, seem to be more cautious and self aware of their ability to manage their portfolio.

For myself, I have a plan in place for every past market condition. From 80% drawdown (that's why Im starting with a cash wedge) to a drawdown that lasts a decade (lower my withdrawal to necessities). One key is flexibility and reasonableness for me. I know if the markets are ripping up 25% in one year I can spend a little more...if they are down 30% I can pull back and not take the fancy vacation. I will re evaluate at the end of each year and adjust accordingly.

My wife and I being content and appreciative of both scenarios is our aim. We can be happy with a lot and happy with a little as long as we have those we love with us. We planned for both and also EXPECT both extremes to happen over the next 40-50 years.

Thanks for getting this conversation going buddy 👊

Sarah Giver

@staystronggiver · 19d

I love this post! Excellent approach to thinking about risk tolerance . The fact that theoretical is not real life can't be stressed enough (coming from having grown up in a wealthy family that lost it all during a market crash).

M @pantomimepotato · 19dEdited

Max drawdown is one part of the equitation. The other part is the duration.

Holding through a drawdown is easy when the recovery happens in a year. It’s a completely different beast when it’s been 5 years and the market still hasn’t fully recovered.

If that sounds bad, imagine contributing to equities while watching “safer” bonds outperform after having already finished their recovery.

Ignoring investing psychology is a recipe for disaster. It takes a lot of mental fortitude to stick with an asset allocation when things start falling apart.

See the full comment section 👀Sign up for the full Blossom experience!

Already have an account? Sign in

Join the conversation with 500,000+ other investors 💸

Create an account to get access to everything Blossom has to offer!

📊 Personalized algorithm based on your investing style, experience level and interests
📈 Powerful portfolio and dividend tracking tools
👀 See what top creators and others in the community are investing in