Do you know your risk capacity?

Posted by TEBI on June 3, 2024

Do you know your risk capacity?





There are few spectator sports more enthralling than American bull riding. The challenge of staying mounted on a bucking bull for at least eight seconds is a supreme test of courage, athleticism and skill. Of course, most of us would never contemplate trying to stay on a bull for a single second, let alone eight. But what if you had no choice? Perish the thought, what if you had to ride a bull all day and every day for decades?

As Mark Hebner explains in Step 10 of his award-winning book Index Funds: The 12-Step Recovery Program for Active Investors, bull riding is an excellent analogy for equity investing.

“Envision the market as a wild bull, bucking up and down, rearing and spinning. Investors are like bull riders,” writes Mark, “trying to hang on as the bull kicks and twists, making for a tumultuous ride. Matching the right portfolio to an individual’s ability to handle risk is akin to finding the right bull that each investor can ride through all the ups and downs of the market.”


Stock markets are like rollercoasters

Now you might be thinking Mark’s bull riding analogy is a little dramatic, but, when we go for long periods without significant volatility, it’s easy to forget  what a rollercoaster ride being invested in stocks can be.

In 2008, for example, a collapse in the U.S. housing market and the failure of major financial institutions led to a global market meltdown. The S&P 500 fell by approximately 38.5 percent that year. The VIX volatility index, which measures market risk and investor sentiment reached a peak of about 80 in November 2008, compared to its historical average of around 20.

In 2020, the onset of the COVID-19 pandemic again sent markets into a downward spiral. In March 2020, the S&P 500 saw its fastest drop into bear market territory on record — it took just 22 days for the market to fall by 20 percent. The VIX peaked at around 82, reflecting intense investor anxiety and uncertainty about the future of the global economy.



This article is based on the book Index Funds: The 12-Step Program for Active Investors. The issues it raises are addressed in Step 10:



Here are some more articles you might like to read:

Are you a speculator or an investor?

Learn to embrace uncertainty

Seven steps to better returns



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© The Evidence-Based Investor MMXXIV



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