By: John P. Napolitano, CFP®, CPA, PFS, MST

What goes up must come down. I don’t want to be the jinx that investors may fear, but someday your portfolios will again suffer losses and you’ll be wondering what to do.

Now that the sun is shining on many portfolios it is a good time to fully understand what the consequences of significant market drawdown may mean for your life and financial plan.

The first place to start is to truly understand how much risk you are taking in your investment accounts.

The first side of risk is just how much your portfolio could decline under a few different scenarios. For investors in risk assets, I suppose it is possible to see your portfolio go to 0, but for most well diversified portfolios that would have to be one worldly catastrophic event. The greater likelihood is a drawdown that is less Armageddon like and more like those we have seen in past bear markets. How would you feel if, as in 2008, your equity portfolio dropped by over 50%? Would that be enough to cause you to sell everything and stuff your nest egg in a mattress? Or are you a longer term investor who has experienced drawdowns before that can tolerate that level of discomfort? It is possible to analyze your specific portfolio and see how it has fared in the past under the full range of prior conditions. Not that the past is any indicator of the future, but it at least allows you to see the historic range and behavior of your investments under those varying conditions. From here, you may agree to modify your holdings. You may look to increase your risk if you are looking for greater gains or you may decide to lower the risk because you realize that you can live with lower net returns over your life expectancy.

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Making Cents is published in GateHouse Media publications every week including the Patriot Ledger.

John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.