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Now we’ve all had a little reminder over the last few weeks of what it feels like when Mr Market smacks us in the face with a loss, I think it’s an excellent time for everyone to assess how they truly feel about their losses. Are you indifferent? Maybe it’s made you slightly stressed, a bit edgy about the future? Or are you constantly checking your account and wishing you had done something before the losses piled up?
Considering your current frame of mind, what do you honestly think your feelings would be if we had a sudden further market drop of 30 percent? If you have an average 60:40 portfolio, that’s going to show up as a massive 18% drop in your wealth. If that really concerns you or possibly makes you feel queasy, it might be a good indication you need to think about derisking some of your equity holdings into short bonds or cash and cash equivalents like treasury bills.
But before you pull the trigger, might it be prudent to think through your situation? Especially if you’re in retirement and drawing from your portfolio for everyday living. Take the 60:40 portfolio as an example. You probably have at least 10 years of spending needs already pretty well insulated from our hypothetical 30% equity drop, sitting safely in your bond and cash allocation.
Although it’s simple finance 101, during a big downturn this fact gets overlooked in the panic of the moment. By switching where you draw living expenses from—prioritizing your bond and cash allocation—you’re not selling distressed assets from your equity holdings. You’re letting them recover while your portfolio does exactly what it was designed to do: protect you.
Ultimately, these thoughts serve as a crucial reminder that risk management is not a knee-jerk reaction, but a calm, calculated process. While the feeling of being smacked in the face by the market is a powerful prompt for reflection, the most prudent response is always a pause. Before you radically derisk out of fear, take the time to evaluate your emotional tolerance and your portfolio’s practical ability to weather the storm.
If you have a bond and cash buffer protecting your immediate needs, you’re already insulated. By prioritizing calm thinking over panic selling, you avoid turning a temporary market dip—be it 6 months or 6 years—into a permanent loss, ensuring your long-term financial strategy remains intact and aligned with your personal goals.
Always remember: equity losses are nothing more than numbers on a screen until you sell and crystallize them in the real world. Don’t let Mr Market bully you into making that mistake. Use your bonds and cash as designed, stay the course, and let time do the heavy lifting.
It is also useful to realize that equity gains are also nothing more than numbers on a screen. They too are a mirage, until the stock is sold and the gains are locked in as cash.
A very good reminder of why we rebalance our equity gains back to target: It crystallizes the gains into our more stable bond/cash spending buckets.
I would have to pay huge capital gains taxes if I sold my stocks. So instead, I have just not been reinvesting the dividends, and I have a considerable pile of cash. I am just buying 4-week T-bills, and waiting to see what happens.
My target allocation is 50% stocks. When I took my RMD in early to mid October I rebalanced to 50%. I have no plans to do anything else until next October unless the allocation drops to 45%.
The lead article on The Economist on November 23, 2025 says that getting out of the stock market at this time “might be a mistake.” It noted that the market volatility happened when there was good news that Nvidia company still earns lots of money with 70% profit margin. For index investors, it’s worth noted the history of Nasdaq before the dotcom bust. The Nasdaq had 12 separate corrections (over 10% drop) between 1995 and 2000. Those who refused to sell in this period had a cumulated gain nearly 1,100%
While that is true, it is also true that the Nasdaq didn’t pass its peak in Feb 2000 until Nov 2014. Since 2014 the Nasdaq has almost quadrupled in value and has provided historic gains over the past 30 years. Nevertheless, a 14 year period of no gains was likely problematic for some of those who retired in 2000.
The ongoing concern about Nvidia’s enormous growth is that a large part of it is due to investments from companies that have yet to turn a profit from AI.
Excellent point, PS. One’s view of a market downturn can — and should — be significantly impacted by whether one is 60, 70 or 80 years old.
I have related before my story of reluctantly selling Cisco, then a tech bellwether as Nvidia is today, at $80 in 2000 in order to buy a house (for someone I should not have married). It turned out to be the stock’s absolute peak before the downturn.
I mention it again only because CSCO did not reach $80 again until… last week. A quarter-century later. My point is that if something happens to NVDA, now a load-bearing wall for the Nasdaq, the speed of the index’s recovery cannot be assumed.
Good addition. It shows how the emotional discipline advised by ‘Mr Market’ (staying calm) is complemented by The Economist’s data (the 1,100% Nasdaq gain). You need both psychology and history to weather these corrections.
Spot on.
Our allocations happen to be very conservative at present. Should the market nose dive, I’ll be re-allocating back up to where they should be.
Otherwise, I’m pretty indifferent to market gyrations.