Not a very common topic being discusses on Fintwit & Commonstock by retail investors but a very important one is maximum portfolio drawback.
I am honestly curious if you considered what is your maximum portfolio drawback that could happen and wouldn’t make your nervous? Is it -30%? 50%? Maybe even 70%?
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I can’t handle 70%. That is a mistake in my opinion. I’d rather sell for a loss and buy back for that much cheaper.
I accept that any day my portfolio could significantly drop. History is littered with stock market crashes. All of the money I have invested is invested because I like investing in stocks and doesn’t have any other purpose.
There is a long term goal of early retirement but that goal is 18 years away so any significant drop I would view as a flash sale.
My general philosophy to losses is that after an initial investment I will dollar cost average down twice creating three lots in the stock. At this point if it keeps going down I’ll just ride it out and hope it comes back or if I see the share price stagnate for a period of months I’ll cut my losses and reinvest any money leftover.
As I learn more this process will probably get refined but so far it has worked for me but I’m also aware this is a bull market with all time highs in many sectors.
I like to practice reminding myself that at any time high growth stocks could drop 30%-50% due to a macroeconomic factor. Know what you own, why you own it and have reasons why the business will likely be more valuable in the future.
I heard of someone that would set an entire portfolio stop loss at 30% and when those stop losses trigger, he waits until 3 green closes to come back into the market. I've since adopted that strategy. I'll sacrifice those 3 green days to avoid the probable further losses accrued.