Investing Made Simple by Uncle8888 (24)

Read? Investing Made Simple by Uncle8888 (23)

Emotional tolerance for Risk/Reward

In life, we will develop good and bad personal and social habits. We will try to keep good habits and reduce bad habits as far as we could. Similarly, in investing we will develop investing habits. Some investing habits that we have developed may actually hinder us from achieving our long-term investing goals.

Our investing habits are likely to be shaped by our emotional tolerance for Risk/Reward and our pain threshold for sitting through paper losses. It is harder to judge whether such investing habits are good or bad as they are often quite subjective and personal.

So it is up to every individual investor to seriously think about it; honestly examine and evaluate themselves. They can measure and benchmark their investment performance to others in their close investment community to do sanity check and ask themselves. Are these investing habits helping them or hindering them?

One way to know our emotional tolerance to risk/reward is to examine our current portfolio holding. What is the total unrealized losses vs total unrealized profits in the current holding. Are we sitting on too many counters that have unrealized losses of more than 50% and few counters of unrealized profit of less than 20%.

So it is quite clear that investor has low reward, high risk emotional tolerance with relatively high pain threshold of paper losses. He is quick at taking small profits but good at keeping paper losses and slow in cutting losses even he is lacking money to invest.


Next, we may want to look at CAGR or XIRR since investing. A low single digit or negative CAGR or XIRR will tend to confirm it. A low reward, high risk emotional tolerance with relatively high pain threshold may actually hinder you from achieving your long-term investing goals. 

You may want to seriously examine your emotional tolerance for Risk/Reward and see where you are now.