Revisiting My Emotional Risk Tolerance

What happened during the past weekend made me change my mind on my own emotional risk tolerance.

I had a serious mental breakdown. I was crying uncontrollably on Saturday, and then I was crying uncontrollably on Sunday.

I basically felt very hopeless. My hopes and aspirations of being a full time investor relied heavily on my job performance and my career’s ability to increase salary gradually over time. The problem was I’m struggling with my job right now (my 1st job out of college) since joining my current company this June, and the fear that I won’t get a promotion, or worse, getting fired seemed so imminent.

Survival was a real question, let alone saving up enough money to become a full time investor.

My self worth went down the drain with my job performance as well, since I’ve always strove to live out Charlie Munger’s quote of “The safest way to try to get what you want is to try to deserve what you want. It’s such a simple idea. It’s the golden rule. You want to deliver to the world what you would buy if you were on the other end“, yet here I was struggling and not feeling like I deserved my job. There had been many points in the past few months where I felt that if I were my own boss, I would’ve fired myself for such dismal performances.

And then the topic of emotional risk tolerance just dawned upon me. I am absolutely not prepared for volatile illiquid investment strategies such as NCAV stock strategies at all.

Study after study prove that you can make money off of buying stocks below their NCAV, but in order for it to work, you would need to be ready to hold it for at least 1 year and at most 2-3 years and withstand the volatility throughout holding the stocks.

The thing is, at this stage of life I need every penny of mine to have as much liquid assets as possible to cover my ass when unlucky events happen in my career. One thing I realized since having my serious mental breakdown is that to be able to sleep well at night knowing my ass is covered is such an underrated thing, considering I currently only have 5 months emergency funds and it makes me feel very uncomfortable.

Warren Buffett once said:

We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially.

To be able to reap the benefits of investing, it requires rationality to survive through volatility in order to realize the gains, and every ounce of cash on hand that can help my rationality to stay intact is appreciated.

I remember during my days of being a die hard Boglehead (fanatic of John Bogle’s teachings of using index funds only), I read how fellow die hard Bogleheads fared during the 2008 financial crisis. One account that left a huge impression on me was when a very senior and long time Boglehead by the name of “Sheepdog” started a thread on the Bogleheads forum with this post on Oct 10th 2008:

I have been retired for 10 years. I am one who has said over and over again. Stay the course. Look for the long term. Yeah, sure. That’s fine until today. Today did it. I am just starting to be scared so that I won’t tell my wife what happened today…stocks down…bonds down…I’m down. Our retirement funds are sucking down the drain. I lost today alone a year’s worth of normal distributions for expenses. I keep thinking tomorrow will be a turn around. I have said that for 30 days.
I am 25% capitulating tomorrow, maybe 50% to money markets….maybe all.

This is not me. I will see tomorrow.

You can read 2 years later his lessons upon the whole ordeal during the 2008 financial crisis, which was:

When a person must take distributions to meet expenses, and I do monthly, an adequate “cash” account should be maintained so that they don’t “have to” sell at market lows. Keep a sizeable cushion. I am doing what I said I would do…..I maintain the “cash” account from which I take distributions at a minimum of 3 years of needs. I sell stocks and bonds every few months to keep it up. When the next big downturn occurs, and it will, I will not have to sell any investments for at least 3 years. I won’t get caught again.

For me, a comfortable amount of liquid assets after serious consideration is 2 years emergency funds as well. The rationale is similar, since if I were to embark on a NCAV strategy, I have to expect my invested capital to be locked in for at least 1 year, and I don’t want to be forced to panic sell when I run out of money before my NCAV stocks hit intrinsic value and earn me a profit.

Also a major reason why I’m moving to a less volatile strategy for now is because my ability to stomach volatility is essentially untested. On theory I understand that true risk is permanent loss of capital instead of volatility, but I have yet to see how I would react when I see my own portfolio have 20% or 50% drops in value. If I have 2 years emergency funds, I can proceed to afford experimenting with different strategies to determine how much volatility I can endure in the pursuit of higher returns.

I also emphasize on the term “liquid assets” instead of cash because of the way I plan to construct my 2 years emergency funds. Liquid assets will also include index funds, but I will only buy index funds heavily after a bear market run and when the index fund prices rise above the 30 week simple moving average to prevent buying too early.

The reason why I include index fund shares bought heavily near the bottom of a bear market run is because I can enjoy the price appreciation and dividends that comes with index funds while buying near the bottom of a bear market run essentially minimizes risk by keeping a floor under the price, where the likelihood of losing money on index funds when I actually need to cash out very unlikely.

The reasons why likelihood of losing money on index funds bought heavily near the bottom of a bear market run is very likely is because prices would be inflated during a bull market run, I’d hedge overvaluation by 2% cash for every 1% overvaluation to gradually cash out before prices drop, and what’s remaining of the shares that haven’t been cashed out during a bull market run have to drop all the way down to the bottom of the previous bear market run. The extremely unlikelihood of all three measures failing is what I’m willing to bet on.

The amount I’m willing to commit to index funds when the bear market run is near its bottom point is everything bar 1 year worth of redundancy fees and emergency funds. The 1 year worth of cash is to help me survive for my next job hunt in the event I get laid off.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)


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