Foundations · Four Levers
What You Actually Did in the Last Drawdown
The questionnaire measures what you hope you would do. Your last sale measures what you did. Build for the second one.
Capacity and temperament are different
Risk capacity is financial. It is how much you can lose without changing your life. A 35-year-old with a stable job and no mortgage has high capacity. A 68-year-old drawing a pension from a finite pool has low capacity. This is maths.
Risk temperament is what you feel and do when the loss is happening. It is almost disconnected from capacity. There are wealthy people who cannot sleep when a portfolio is down 3 per cent, and people with modest balances who left everything alone through 2008 and 2020 because the plan was written and they trusted it.
Capacity tells you what you can do. Temperament tells you what you will do. In markets, what you will do under pressure matters more.
Not every sale is panic
Before you convict yourself, separate the reasons:
- Planned rebalancing after a large move.
- An essential withdrawal (living expenses, a debt that had to be paid).
- A pre-written invalidation rule that triggered.
- Panic, boredom, or a tip.
The first three can be consistent with a sound process. The fourth is evidence about temperament. Most people mix them up in memory and give themselves credit for discipline they did not show, or blame themselves for a sale that was actually planned.
If you have never lived through one
Questionnaires filled out in calm markets overstate tolerance. If you have never watched your own money fall 25 or 30 per cent, you do not yet have revealed evidence. That is not a character flaw. It is missing data. In that case, size the volatile sleeve smaller than your capacity suggests, write the review rule before the next decline, and treat the first real drawdown as the test rather than the proof.
What the evidence is for
It is for choosing methods you can execute, not for aspirational ones. If you sold in March 2020 and regretted it, a 100 per cent equity passive portfolio with no buffer is a bet that you will behave differently next time. Some people do. Most do not. Structure (a cash reserve, automatic rebalancing, a smaller active sleeve) beats hope.
What to do with this
Write one paragraph: the last time your portfolio or a position was down hard, what you did, and why. Keep it. It is the most accurate risk document you own.