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Thoughts on Risk with Investing

Risk has been on my mind lately, so I thought I'd talk about it. The context of this risk is based on risk within an investment portfolio. My viewpoint has evolved with in my own life where I had a significant change in my risk profile and didn't really pick up on that fact. 

The whole point of limiting risk in a portfolio is the idea of hedging against the mental side of the game and also the financial side you may face. The financial situation is obvious, but mentally it is hard. Seeing a portfolio drop by 50% or swing wildly day to day is tough on the head. You may not sleep at night, worried sick, thinking about it. I think the hardest aspect of risk assessing is that it is hard to tell where you'll be mentally when things really hit the fan. How do you really know how you'll be on that day when things get bad? I suppose there are lessons to be learned.

I want to share some of the lessons I've learned over the last year when it comes to risk.

Risk is the summation of risk

I used to think of risk as an aspect of my portfolio, but really that's just one part of risk. Risk, as it weighs on your life, comes from the total risk in your life, even beyond the financial. The risky behavior that you do outside of finances will still weigh on you. It will change the way you respond to situations and still prevent you from sleeping.

For the sake of what I'm writing here, I'll limit my discussion to risk as it pertains to finances. An investment portfolio only makes up one aspect of your financial category. And as such, your risk is the summation of all that risk from your job security, to your financial obligations and so on.

Late last year I made some rather large financial changes, which resulted in a lot of changes to my overall risk. They are as follows:

  1. My portfolio grew to very nice highs, largely do to my play money investments having spectacular returns. 

  2. I made the most expensive purchase of my life, a house.

  3. Due to the nature of being self-employed, I ended up having to put down a larger down payment then expected.

Each of these contributed to a rather large change in my risk.

There is a psychological difference between having a portfolio of $5,000 and $500,000. Even though someone starting out may watch attentively at the small day to day changes of their portfolio, it's just not a lot in the grand scheme of things. A 50% drop stings, but it's something that can be easily replenished. The larger portfolio fluctuates heavily. There's just a different feeling to being down $2,500 compared to $250,000.

A house is something that is considered a good move and not something horrible, but it does come with risk. I'm not so much concerned about a drop in value due to rising interest rates, but it does require financial input for maintenance, insurance, property taxes and the time one has to invest in it. Even if not viewed in a negative light, it changes the total risk one is under.

Lastly, I had to put down a larger down payment on this house. I ended up selling some passive ETFs for this down payment, as my play stocks were in US dollars (I need CDN dollars). This caused a rather blatant change in my overall portfolio. Since these play stocks did so well, after pulling out down payment money, 40% of my total portfolio was made up of two stocks that are risky. The risk profile is much different than that of something like iShares XGRO or AOA.

Risk is easy to ignore, when things are good

With all the above changes in my life, I was able to ignore the big red flags of my changing financial risk because things were going well. The stock market was doing well. My mortgage interest was low. I'm making a good income. Everything is peachy.

Then inflation grew, interest rates went up, the stock market started heading down and suddenly I found myself sitting on more risk than I liked.

I'm not a very causal emotional person. What I mean by that is that I don't usually associate an event to the emotional state I find myself in - unless it's completely blatant (father dies, I feel sad). Often I'll find myself anxious about something, but I don't associate an event to it as the causal reason. 

I haven't been sleeping the best as of late. I don't necessarily have finances on my mind, but it's that lingering thing in your head that eats at you. I find it sort of cute that part of me almost feels like I'm weak and that I can't stomach it. It's not like I choose to struggle to sleep, it just happens to me.

Picking Stocks and Emotional Risk

The funny part about all this is that I have done quite well picking stocks, compared to my passive index portfolio. I suppose everyone feels like a superstar during a bull run. It is nice and feels good during the good times, but everyone knows there are going to be down times and bad times in the marketplace. 

This is the crux of the issue for me is that despite doing quite well with stock picking and them growing, they're turning into an emotional liability that has left me jaded. Constantly watching the market, because I have to, sucks. It really does. Watching things swing down, businesses fail to live up to expectations, your money on the line not reaching highs, trying to figure out when I should exit and take my profits, not wanting to sell below highs, seeing potential for even higher, and on and on. I know first world problems, but mentally it is taxing. It's not that you sit in front of your computer watching all your happy investments go up and smile to yourself. You also watch them stubbornly go down. You also watch them fail to produce, or underperform, or face setbacks - all while your cash is on the line.

I also see the other side of me wanting more. You don't want to get out too early. All these caveats that await a person that just wants to get out at a decent price.

I suppose an aspect of this is being true to what I want. Part of passive investing is the ability to just turn off from investments. I don't need to follow things daily or weekly or monthly. I can check in at my will, and the focus turns to keeping the portfolio in line with my overall game plan.

I'm writing this because I feel it is worth it for my own mental state to actually formulate what is going on in my head and try to put it in text - instead of it living in my head as a liability. I suppose this is the side of picking stocks that you don't hear about. Maybe people can weather the storm better than I, or maybe they're not playing with as much money in these investments, but it's only sunshine and lollipops when things are good.


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