🦉 Can You Handle the Volatility

How do you discover the true limits of your risk tolerance?

Here’s how I figured it out.

I Had It Backwards

In my mid-20s when I first started investing, I wanted to take on a lot of risk.

With a background in finance, having lived in multiple countries, and working in a very high-risk industry in a developing country, I felt confident in my risk tolerance.

Compared to my friends in more stable careers back in the States, I felt gung-ho.

But every time I made and investment, I was anxious. If I had bought a stock and it ended the day down, I felt downbeat.

I tried not to pay attention to it. I tried to let the winners run.

I tried.

But failed too often.

The biggest mistake was ignoring the signals my behavior and body were sending me.

It took a while to admit I was NOT a super risk tolerant investor.

Despite being risk-seeking in other parts of my life.

We live with many internal contradictions. It’s not good or bad. I’ve learned it's just human nature.

Ironically, when I finally had the ‘aha moment’ many years later, I told my wife excitedly. And she responded:

"Yeah, obviously! I knew that 🤣."

Learn from my mistake. Don’t assume you know your risk tolerance until you’ve tested it multiple times. Not in some online risk assessment.

If you’ve been investing for a while, remember how you reacted during the last big market drop? Did you panic and consider move to cash, or did you remain “calm” through the volatility?

I remember the covid crash shook me.

And being more informed and well read doesn’t really fix a behavioral issue.

In March 2020, amidst the chaos, I watched two interviews.:

• One featured the legendary Bill Miller IV, calling it a generational buying opportunity.

• The other guy predicted the worst was yet to come for the markets, something along the lines of another great financial crisis.

Polar opposite recommendations…

Being glued to the news is not going to provide an answer in real time. It will only intensify your anxiety and apprehension during a time crisis - with the media banging the drums of doom.

The Web of Doomers

Another trap that compounded my earlier mistake was being attracted to the call of market doomers. Especially, the more well-laid out and sophisticated their thesis for the next market downfall was.

Nouriel Roubini ✅ Jeremy Grantham ✅ 

There’s something very alluring about pessimism as Morgan Housel rightly points out:

Maybe we are due for a recession, bear market, and some doom. Who can say for sure? At Some point we will inevitably go through them.

The way this goes is like this. Every time there are some dark clouds on the horizon, the media roll out the doomer guys out and give them the limelight.

Like taking out the Halloween decorations to scare the s… out of some susceptible kids. Once the job done, they get put back in storage until the next go.

The media’s business is to get more eyeballs not to make you money.

Don’t be Frodo haha.

Don’t go in the cave. Don’t get trapped into the web of doom.

Young Investor Takeaways

Self-Awareness

Pay attention to your behavioral responses and identify the news or events that trigger emotional reactions. Be honest with yourself.

Avoid forcing a portfolio allocation that is too way too aggressive for you, as it could lead to FOMO buying at market peaks or panic selling during downturns.

Be prepared for a lot of discomfort.

As an investor, especially in equities (or crypto haha) you have to get used to gut-wrenching volatility. There is no way around it; volatility is part of the price to get returns.

Find an Advisor You Trust

Market crisis and panics is when you’re advisor has to be your anchor, this is where he’s gonna really earn those fees.

IF you trust and understand your allocation and IF you trust you’re advisor you won’t panic sell.

If NOT that relationship is screwed…

Wanna keep growing as an investor with real, relatable advice?

Subscribe and receive my next piece directly in your inbox. No BS, just reality. 👇️ 🦉

Quote of the Day