Thinking in terms of percentages and conceptual drawdowns in the fuzzy future does not always have the same punch in the gut as a concrete number. So, let’s try a visualization exercise.
How much money do you plan to have invested five to ten years from now?
That would be the money you already have invested plus what you put in plus the profits. For example, if you already have a large portfolio and are adding to it, the annual investment may be small but the balance large. Just take a guess. Doesn’t need to be perfect.
Think about how hard your toiled to build that nest egg. Bask in the glow a little.
Enter these numbers in “The Gut Puncher”, The cream coloured fields are editable.
We all hope to see our portfolio achieve our goals. Over the long run, they should. However, it is normal to have significant drawdowns along the way. Seeing how much money you are down in actual dollars bothers grabs your attention. Thinking about how many years of toil and investing that has temporarily set you back can make you feel ill. We naturally do that even though it is not a real loss unless we sell. That feeling could easily cause you to sell to make that pain go away. Our brains are wired that way.
So, pick a stock:bond allocation that isn’t going to make you feel that way during a major market drawdown. They happen every few years and that is when your risk tolerance really matters.