Investors over-estimate their tolerance for risk.
It’s easy to feel like a genius in a bull market – but it’s only after you lose big money will you understand what it’s like to be on the wrong side of a market.
It’s not just the financial loss you take – it’s the emotional toll that losing money takes on your sense of well-being and your health, which can be significant.
Thus, managing downside risk can be of great importance in more ways that one.
Home prices in California peaked in 2006 and then proceeded to fall 41% before they hit bottom in 2012. (Source: FHFA).
That means a 70% gain was required to recoup your losses and get back to break-even.
To make matters worse, it took 12.5 years before CA home prices returned to their 2006 peak.
That’s why the first rule of money is don’t lose it.