During his recent interview on the Excess Returns Podcast, Rob Arnott explained why your tolerance for downside risk is considerably less than you think it is. Here’s an excerpt from the interview:
Arnott: It’s interesting. In the market crash in 1987, and in the tech bubble bursting in 2000 to 2002, and in the global financial crisis of 08/09. Within weeks of the bottom in every case I was sitting next to somebody on a plane who said what do you do?
And I say I’m in Investments and they’d say, oh can’t believe the stock market. I’m never going to invest in stocks again as long as I live.
I’ve had almost the Identical conversation in three separate major market declines within weeks of the bottom. Nobody’s bet my ear on that topic this go around so based on the highly statistically significant sample of three conversations that means we’re probably not at the bottom yet.
But people, when I hear something like that that just tells me you exceeded your risk tolerance at the high. The problem isn’t that you have too much in stocks now, the problem is you had too much in stocks coming into this.
And people need to gauge their risk tolerance. It is almost impossible to gauge your risk tolerance with any precision but you can safely assume that your tolerance for downside risk is considerably less than you think it is.
You can watch the entire discussion here:
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