Key insights
- The post explores the critical role of drawdown tolerance in investment strategy adherence. It questions whether high potential returns are worthwhile if accompanied by significant drawdowns that investors may be unable to withstand psychologically. The discussion highlights the importance of aligning investment strategies with individual risk profiles and the potential for emotional decision-making during market downturns, which can negatively impact long-term investment outcomes.
Serious question:
At what point would you abandon an investment strategy, even if you believed its long-term returns were strong?
Would you hold through:
-10%? -20%? -35%? -50%?
And does your answer change if the strategy historically delivered much higher returns than the market?
I’m starting to think drawdown tolerance may matter more than returns, because a strategy only works if you can actually stick with it.
For example:
Would you prefer:
A) 35% annual returns, but occasional -35% drawdowns B) 12% annual returns, but never worse than -13%
Which would you actually choose with real money?
And more importantly… would you still choose the same after living through the drawdown?
Curious where people draw the line.