Jan. 5, 2026

Why Investing Feels Risky to Most People (and Why It Usually Isn’t)

Why does investing feel so risky to most people—even when history shows otherwise? In this episode, we break down the psychological and structural reasons investing triggers fear, uncertainty, and hesitation for so many individuals. From market...

Show Notes
Transcript

Why does investing feel so risky to most people—even when history shows otherwise?
In this episode, we break down the psychological and structural reasons investing triggers fear, uncertainty, and hesitation for so many individuals. From market volatility and media headlines to loss aversion and short-term thinking, we explore why investing feels dangerous—even when long-term data suggests it usually isn’t.
This is not about stock tips or predictions. Instead, the episode focuses on how risk is commonly misunderstood, how time changes the nature of investment risk, and why doing nothing often carries its own hidden costs.
Whether you’re new to investing or simply skeptical, this conversation reframes risk in a clearer, more practical way—helping you separate emotional reactions from reality.
In this episode:

Why volatility feels scarier than it actually is
The difference between short-term risk and long-term risk
How human psychology distorts investment decisions
Why “playing it safe” can quietly erode financial progress

Educational and informational only. No hype. No predictions. Just a clearer way to think about investing and risk.

WEBVTT

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This is smart money explained, where finance is broken down

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clearly without hype, opinions or predictions. Today we are wrestling

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with a monster, one that's you know, completely psychological, yet

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it controls trillions of dollars around the world. I'm talking

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about that pervasive, that really deep seated fear that investing

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in the stock market is just it's too risky, it's

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too hard, or frankly, it's just glorified gambling.

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Right, And for millions of people, that belief is this powerful,

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invisible barrier. It stops them from participating in what is,

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you know, historically one of the greatest wealth creation engines ever.

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And that fear, that that hesitation, it's maybe the single

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greatest obstacle to building wealth for the average person.

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Oh absolutely, We're not just talking about a minor hurdle here.

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We're talking about a deep, instinctual avoidance of potential loss.

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So our mission today is to take this stack of

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sources you've pulled together.

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Yeah, we've got everything we do.

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We're covering everything from like ancient human evolution and brain

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function all the way to quantitative studies on merger rumors

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and investor timing. And we're going to use them to

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fundamentally challenge that ingrain fear.

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So the goal is to show that the perception of

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risk is well, it's often profoundly disconnected from the reality

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of long term market history.

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Exactly. We're basically going on a myth busting mission.

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Okay, I like that, a myth busting mission. We're going

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to expose the psychological traps and the media noise that

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makes investing feel dangerous when statistically speaking, the biggest financial

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risk for a lot of people is often well, it's

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not investing at.

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All, that's it, precisely. And I think the best place

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to start is by just dismantling the practical barriers people

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often bring up, because really, technologically and mechanically those excuses

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have just vanished.

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They're gone.

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They're gone. We've got sources from financial analysts Nasdaq's perspective

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included that confirm the mechanical barriers to entry are practically

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non existent today.

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All right, So let's tack the three biggest practical myths

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head on, because they still cling to the narrative, you know,

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like these stubborn barnacles, even though they've been completely debunked

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by the last decade of tech.

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Okay, Leimani.

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Myth number one is.

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The big one.

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It's the core emotional roadblock. Investing is too risky, right, And.

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While yes, all investments carry some degree of risk, we

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have to be really specific about what kind of risk

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we're talking about. The long term historical data, I mean

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it overwhelmingly favors stocks overwhelmingly when we look at something

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like the S and P five hundred, Historically it's provided

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these substantial positive returns, averaging around ten percent sometimes more

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per year over long rolling.

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Periods, which is incredible compared to say, just leaving your

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money in a savings account or.

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Bonds or cash. Yeah. The key insight that all the

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analysts stress is that risk isn't something you avoid entirely.

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That's impossible, something you actively manage. You reduce it with

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a diversified, well thought out strategy.

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Because ignoring the market entirely has its own a.

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Huge one, the risk of having your capital just eroded

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by inflation over time. That it is a guaranteed loss,

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just a slow motion.

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One slow motion capital loss. I like that, Okay. Myth

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number two used to be a very real hurdle, especially

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for younger people or anyone without a high income. It

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costs too much to start.

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I mean, I remember when a basic brokerage account it

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required a minimum deposit of like thousands of dollars, and

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then you were paying a hefty commission, maybe twenty thirty

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dollars for every single trait.

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Oh yeah, that absolutely screened out the average person. But

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that information is completely outdated. It's just it's essential that

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you understand how much that landscape has changed.

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So what's the reality today.

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The sources confirm that many major reputable brokerage firms now

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offer accounts with absolutely no minimum deposit requirements zero.

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So you can start with what, fifty dollars, ten dollars,

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whatever you have. You can start with the change in

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your pocket practically, and the change in trading costs is

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it's revolutionary.

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Zero commission trader exactly.

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It's eliminated that friction cost, making it feasible to invest

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small amounts without being penalized. But the real game changer,

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the thing that directly benefits people with small starting balances,

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is the invention of fractional shares.

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Explain that because I think a lot of people still

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don't quite get how powerful this is.

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It's a simple concept. It just means you don't have

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to buy an entire share of a company like Amazon

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or Google, which might cost hundreds or even thousands of dollars.

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Which is impossible for most people starting out right.

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Instead, you can buy one tenth of a share or

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one hundredth of the share for just a few dollars.

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This mechanism makes it possible to immediately build a globally

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diversified portfolio using ETFs with literally with pocket change. The

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financial plumbing has been completely overhauled for accessibility.

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Okay, so it's not too risky in the long term

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and it doesn't cost too much to start. That brings

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us to myth number three, which I still hear constantly.

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Investing is hard and time consuming. You have to be

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like a math genius or some kind of insider tycoon, right.

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And that belief fosters this idea that you can't succeed

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unless you're trying to beat the market to outsmart everyone.

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Else, which is not the goal, not at all.

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The irony is that the most successful evidence based strategy,

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the one that's proven over decades of data, is often

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the most passive, most simple strategy. There is low cost

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index investing.

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The set and forget approach exactly.

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Technology has made implementing this strategy incredibly efficient. So success

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isn't about complexity, It's about consistency. You set up automatic

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contributions to a global index fund and you just you

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stick to it. The difficulty isn't in the mechanics. Those

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are simple. It's in the discipline to stick with it

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when the world around you is screaming to do otherwise.

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Okay, so let's unpack this. Then, if the practical barriers

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are gone, it's not expensive, it's mechanically simple, and the

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long term odds are demonstrably in your favor, then why

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is this widespread fear so persistent?

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That's the real question, isn't it.

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Why do smart, rational people procrastinate or feel this intense

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jolt of anxiety like they're at a casino when they hit.

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The buy button?

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And that's the deeper question. The answer lies in this

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fundamental mismatch. Our human operating system is running on ancient hardware.

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As you said, investing is simple by low cost funds,

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hold them forever. Simple, But it is profoundly not easy

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because it requires immense self discipline, patience, and this ability

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to add contrary to your deepest, most primal instincts.

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Okay, So this is where we get into the psychology

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of it all. This is part one the evolutionary handicap

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why our brains fight rational investing.

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We have to acknowledge a really critical piece of anthropological

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context here. Our minds were optimized for a very, very

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different existence. For about two hundred thousand years, Homo sapiens

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lived on the prehistoric savannah, focused entirely on immediate day

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to day survival.

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Right finding food, not getting eaten exactly.

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Our emotional and cognitive programming developed to handle short term,

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high stakes threats.

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The famous fight or flight response. I mean that mechanism

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is an evolutionary miracle. It's what kept us alive when

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we saw a lion or had to make a lightning

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fast decision about you know, whether the rustling in the

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bushes was dinner or danger precisely.

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Now, fast forward to today, the financial system, stocks, bonds, derivatives.

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This is a highly complex modern invention. It's only existed

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in a recognizable form for a few centuries.

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A blink of an eye in evolutionary terms, a total blink.

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So we are asking our two hundred thousand year old

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brain software which prioritizes immediate threat avoidance, and immediate consumption

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to handle a financial environment that's optimized for decades long

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patients and intellectual reasoning.

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So there's a total mismatch, a complete mismatch.

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The very traits that ensured our survival on the savannah,

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quick emotional response, intense focus on immediate threats, a preference

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for immediate gratification. Those are the same traits that are

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actively counterproductive in modern finance.

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So when the market and we see that terrifying screen

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full of red numbers, our ancient brain is fundamentally misinterpreting

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the signal.

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It s he's a lion, It seeds a lion.

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Or a sudden catastrophic loss of a food source, even

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though what we're actually looking at is just a temporary

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price fluctuation on a spreadsheet.

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It triggers that same deep seated threat avoidance instinct. But

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the most powerful force working against us in finance is

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a psychological phenomenon called loss a version.

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Right, this is the core behavioral bias from the Nobel

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laureates Daniel Konnoman and Amos Tversky. Their work on this

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is just foundational. Absolutely, it's based on decades of research

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into decision making under uncertainty, and it's so so powerful.

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So let's quantify the impact. What did they conclude about

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the relative weight of gains versus losses on our psyche?

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They concluded that the pain of losing money is psychologically

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twice as powerful as the pleasure of gaining an equivalent amount.

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Twice as powerful.

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Wow. So to put that into real terms for you, Yeah,

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if you lose one thousand dollars in the market, the

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emotional damage you feel is equivalent to the joy you

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would feel from gaining two thousand dollars.

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You need twice the reward just to get back to

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neutral emotionally, just.

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To neutralize the pain of the loss. And this is

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rooted so deeply in prehistoric scarcity. Our ancestors just couldn't

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afford to lose resources, losing a hunting tool, losing a

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cash of preserved food. I mean, that could be a

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death sentence for the entire group.

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That makes perfect sense. Losing a resource was a guaranteed

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survival penalty, whereas gaining the equivalent amount was just a

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temporary benefit.

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It wasn't symmetrical, not at all.

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And that biological imperative translates directly into bear market panic.

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Right when you see your portfolio drop by ten percent

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during a correction, the emotional response is disproportionately huge. It

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far outweighs the rational understanding that markets usually recover, and.

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This is why loss of version leads to these really

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common destructive investor behaviors.

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Absolutely, during a market sell off a sudden the instinctual

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action is to flee the danger. Your brain is just

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trying to stop the pain, so it pushes you to

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sell to realize the loss and make the psychological damage stop.

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And the tragic irony is that this leads to emotional

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selling at the absolute worst.

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Time, at the exact wrong time, during peak panic, and

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that act of selling is what transforms a temporary on

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paper fluctuation into a permanent, irreversible capital loss.

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We see this played out in all the studies of

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investor activity during crises like a global financial crisis in

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two thousand and eight. People were actively pulling their money

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out of the market right at the bottom.

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Guaranteeing they would miss their recovery. But loss of version

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also works on the upside, doesn't it. It can cause

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us to sell our successful investments way too early.

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Right, It's the flip side of the same coin, the

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tendency to hold on to losers for too long and

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sell winners too soon.

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Exactly, you hold a losing stock because you want to

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avoid that painful realization of loss. You keep hoping, praying

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it will climb back up to break even, even if

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the underlying company is failing. And on the other hand, conversely,

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when a stock is successful, you sell it really quickly

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to lock in the gain and avoid the risk of

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losing that pleasure. You take your winnings and run, but

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you miss out on potentially massive future compounded growth.

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So in both cases, the instinct to manage immedia emotional

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pain completely overrides the rational analysis of long term value.

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It's a constant battle. And beyond just avoiding losses, our

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evolutionary programming seems really ill suited for the long game

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of accumulation, particularly saving for retirement.

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We are just inherently terrible at delaying gratification.

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We're awful at it. It's the intense struggle with delayed gratification,

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often called the present bias. If a reward is available

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right now, we will prioritize it over a much larger

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delayed reward.

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Because our ancestors didn't have pensions, or for one.

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Case, no, the concept of saving for some nebulous retirement

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decades away was completely irrelevant. We're wired to prioritize immediate consumption.

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If there are resources available now, we should use them now,

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because tomorrow might bring a famine or a predator.

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And that pressure is just amplified infinitely by modern consumerism.

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Every ad, every social media feed is designed to encourage

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immediate spending and immediate gratification.

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Precisely, and this is why, as our sources note, if

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investing is mechanically simple, spinning everything you have is even easier.

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They drew a brilliant analogy between investing in fitness. Working

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out is simple in concept, eat less, move more, but

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it's profoundly difficult in execution because of the required discipline

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and the delayed payoff.

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The psychological cost of showing up to the gym every

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single day when you're not going to see dramatic results

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for six months is immense.

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Investing is identical. The process of dollar cost averaging into

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an index fund is so simple mechanically, but the discipline

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required to maintain that during a ten year period of

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a flat market or worse, a deep recession that's where

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human psychology feels us.

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That lack of immediate rewardger's the present.

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Bias it does. It makes saving feel like a parnishment

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rather than an investment in your future self. It forces

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you to literally battle your own biology.

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And then there's the social element, where tribal creatures were

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hardwired to pay attention to what the people around us

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are doing and saying, how does that reliance on tribal

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communication translate into bad financial decisions?

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That's the reliance on gossip. In the anthropological sense, our

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survival depended on rapidly exchanging information, even if it was

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unreliable information with members of our tribe.

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Right, Hey, there's a predator over that hill, or I

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found barriers over.

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Here, exactly. And in the modern context, this translates into

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giving undue weight to casual advice, you know, hearsay from friends, family,

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or some self styled money guru on a forum, rather

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than relying on thorough research or a consistent strategic plan.

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We value the story, the narrative, and the emotional connection

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over the dry quantitative data.

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So the person who brags at the dinner table about

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their one stock that went ten x.

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But conveniently forgets to mention the three others they blew

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up trying to trade options right.

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That person suddenly becomes the expert in the tribe.

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Exactly, and that narrative feeds directly into another counterproductive trait,

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over confidence. Confidence might have helped our ancestors gain social standing,

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but in finance, it leads investors to believe they can

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easily outperform the professional market based on limited information or

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a gut feeling.

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The sources are really clear on this. Being successful at

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investing is generally based on patient, passive accumulation, low costs,

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a solid strategy, not gut feelings.

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Your intuition might save you from a lion, but it

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will not save you from a poorly constructed, actively traded portfolio.

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We are wired to seek attention to feel clever, and

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those psychological needs often lead us away from the simple,

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passive and frankly boring strategy that actually works best.

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Okay, so that's a pretty damning case against our own brains.

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It feels like we're set up to fail. The reason

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investing feels risky is primarily internal. It's our primal fear

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mechanisms misfiring in a modern context.

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That's the core of it.

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But we need to move beyond the emotion now and

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define what true financial risk actually means. Because that's the

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difference between temporary discomfort and permanent damage. We have to

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clarify what we are actually risking.

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This distinction is paramount. It is the single most important

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concept to grasp to overcome that evolutionary fear. Investors often

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lump two very different concepts together precisely because of loss

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of version.

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So this is part two reframing risk. Volatility is not

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capital loss.

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And we're going to rely on some insights provided by

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Dorset Wealth Management to really clarify this. There are two

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very different dangers at play here, the risk of losing

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your capital and price volatility.

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Okay, let's untack this core difference with surgical precision. What

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is the risk of losing capital?

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This refers to the permanent, irreversible reduction of your initial investment,

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your principle. This happens when an asset appreciates significantly and

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just fails to cover, often because the underlying thing, the

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company the investment vehicle, goes bankrupt or defaults, or just

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experiences a permanent structural decline.

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This is where diversification becomes so essential because if you're

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all in on one stock, the risk of that single

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company going and solvent is an idiosyncratic risk, a risk

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unique to that one asset, and that could lead to

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a one hundred percent permanent capital loss.

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Exactly, permanent capital loss is the plane never reaching its destination.

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Our sources use the two thousand and eight financial crisis

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as a classic example. Investors who had highly concentrated holdings

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in specific financial institutions. They experienced true permanent capital loss

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when those firms failed or were restructured into pennies on

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the dollar.

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That loss is irreversible without putting more money.

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In correct, you can't get it back now. In contrast,

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what exactly is price volatility because that's what we see

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every single day when.

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The market is open, right, the ups and downs.

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Volatility is just the temper very short term fluctuations in value.

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It is the natural, inevitable characteristic of how markets behave.

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It's driven by daily news, investor sentiment, geopolitical events, you

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know all of it.

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But the crucial difference is that volatility does not necessarily

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mean permanent loss of capital, not at all.

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Historically, the broader market typically corrects and resumes its upward

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trajectory over time.

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So volatility is the turbulence on the flight. It's uncomfortable,

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it's stressful, it might make you question your decision to

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get on the plane, but it's usually temporary. If the

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overall structure of the market is sound.

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That's a perfect metaphor for this context. And let's use

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a very recent example the start of the COVID nineteen

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pandemic in early twenty twenty. The Australian ASX two hundred index,

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for example, dropped nearly forty percent between February and March.

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I remember that it was terrifying to watch.

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It was immense, stomach churning volatility. It reflected maximum fear

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and uncertainty. However, by the end of that same year,

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the index had largely recovered to where it was before

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the pandemic.

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The recovery was so fast, but the psychological hurdle of

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that drop was massive.

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It was and this is the core lesson investors who

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sold during that sharp forty percent decline. They locked in

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a loss that was caused entirely by temporary volatility.

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They took the turbulence and they turned it into a

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permanent capital loss.

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They did, but those who maintained their discipline, diversified long

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term approach, who simply rode out the turbulence. They avoided

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that permanent loss and they benefited fully from the recovery.

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Their portfolio numbers looked terrifying on paper for a few months,

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very terrifying, but they never realized the loss. They never

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made it real.

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That is the crucial insight. The decision to sell during

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volatility is what transforms a temporary paper loss into a

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permanent financial mistake. The market itself didn't cause the permanent loss.

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The investor's emotional response driven by loss aversion.

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Did, and that realization leads us to the concept of

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risk capacity. This is your practical ability to withstand loss,

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and it's determined two main things your investment horizon, how

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long until you need the money, and your cash flow needs.

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So if you're twenty five years old with a steady

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job and a forty year horizon until retirement.

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Your capacity for loss is very high. You can comfortably

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ride out severe turbulence. But if you're sixty and you're

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planning to retire in eighteen months, your capacity is low,

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and your portfolio should reflect that lower tolerance by having

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fewer volatile assets, and.

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The investor needs to understand that they are basically being

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paid to endure that volatility.

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That's a great way to put it.

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Which brings us directly to the long term asset allocation

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data we have covering over a century from nineteen one

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to twenty twenty two. This really quantifies the relationship between

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volatility and long term returns.

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This data is so critical because it brilliantly illustrates that

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volatility is indeed the price of admission for potentially higher

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