By Dr. Rikki Racela, WCI Columnist
Wouldn’t it be great if, as investors, we could increase our risk tolerance? The ability to stay 100% equities and not worry about 30, 40, or even 90% losses without blinking an eye would be an amazing talent. And such a talent would lead to a surefire way of reaching financial goals and never committing the cardinal sin of selling low in a bear market. But is risk tolerance something that can be modified? What would be the mechanisms where our brains learn to increase risk tolerance? Is this even possible? What evidence do we have to indicate that our human brains can modify such an intangible characteristic as financial risk tolerance to maximize returns?
Dr. Jim Dahle and others say that yes you can!
There seems to be consensus in the personal finance blogosphere that risk tolerance can be increased. In the September 2021 WCI monthly newsletter, Jim mentioned five ways to increase risk tolerance (if you missed that newsletter and want to make sure that never happens again, you can rectify that here):
- Understand Financial History
- Don’t Look in a Downturn
- Put on Handcuffs
- Invest in Less Liquid Assets
- Need the Money Less
He then recited one of his favorite quotes by Phil DeMuth, “People's comfort with investment volatility is dependent on their current state of mind. When the stock market is racing up, people are comfortable with volatility.”
This idea that risk tolerance changes with changing conditions is also agreed upon by FI Physician in his article on risk tolerance and asset allocation. However, in another article, he says that 50% of risk tolerance might be set in stone, just like happiness. So, is risk tolerance really as malleable as some believe? Follow me as we delve into why neurology says YES!, that risk tolerance can be increased.
(Warning, nerd alert: I will be going into some neural evidence and pathways here, but that's what happens when you read a column written by a neurologist!)
Lessons from Pavlov’s Dog
My fellow physicians may remember learning about Pavlov’s dog in medical school. If you don't already know the story, Pavlov’s dog refers to instinctual learning. When a dog is presented with food, they will start to salivate as a natural, ingrained response. But in an experiment, Pavlov modified the scenario. Not only was food presented to the dog but a bell was rung at the same time. Every time the dog was presented with food and the bell was rung, the dog would salivate. Trials of this were run over and over again. Pavlov found that after enough repetitions if only the bell was rung but there was no food, the dog would still salivate. Ha! Learned behavior! Pavlov demonstrated that animal instincts are not hardwired at all. They are highly adaptable—even something as basic as a reaction to food can be modified.
Let's apply this observation to our finances. Many of our visceral and central reactions to the stock market in the form of risk tolerance are likely highly modifiable. Despite Pavlov demonstrating this phenomenon in dogs, human brains are much more complex and dynamic in terms of learning and adaptation. Our brains—which have enabled us to explore space, contemplate our own existence, and make atom bombs—have a larger chance than a dog’s to modify even the most ancient of our behaviors.
The Molecular Basis of Learning
OK, just when you thought we couldn’t get any more neurological, we are going to dive even deeper. Again, I am a neurologist and I majored in molecular biology in college. Skip this section and move on to the next one if this is getting too far down the science rabbit hole.
How does your brain accomplish behavior modification at the cellular level? Neuroscientists believe that the basis of learning involves a process called long-term potentiation. This is the process by which the neurochemical glutamate is secreted by a neuron and activates receptors on postsynaptic neurons called NMDA and AMPA receptors. The NMDA receptor is not initially activated on the postsynaptic neuron. Instead, the AMPA receptors first respond to glutamate. When that happens, the postsynaptic synapse depolarizes in response, and that activates the NMDA receptor to be ready to react to glutamate.
Voltage-gated channel, anyone? As more and more glutamate is secreted in the synapse and more and more AMPA receptors are activated, then more and more NMDA receptors are activated. The downstream signals from the activated AMPA and NMDA receptors lead to the production of more NMDA and AMPA receptors as well as the creation and growth of more synaptic connections, reinforcing a major neuronal response pathway. This positive feedback loop leads to learning. A behavior is learned because a brain’s response to a stimulus activates neurons that become highly active because of the increased density of NMDA and AMPA receptors and synaptic connections. If all this is a little confusing, here is a nice quick summary of what I’m talking about.
More information here:
Visualizing Your Way to Wealth
So . . . Is the Boring Stuff Over?
Whew, that was rough! Swinging back to finance, how does this discussion of glutamate secretion and long-term potentiation relate to increasing risk tolerance? Well, as Jason Zweig mentions in his book Your Money and Your Brain,
“The reflexive system is primarily headquartered underneath the cerebral cortex that most of us visualize as the “thinking” part of the brain. Although the cerebral cortex is also a critical part of the emotional system, most reflexive processing goes on below it in the basal ganglia and the limbic areas. A knotty bundle of tissue in the core of the brain, the basal ganglia (also known as the “striatum” because of their striped or banded appearance) play a central role in identifying and seeking almost anything we recognize as rewarding: food, drink, social status, sex, money. They also act as a kind of relay station between the cortex, where complex thought is organized, and the limbic system, where many stimuli from the outside world are first processed.
All mammals have a limbic system, and ours works much like theirs—as a kind of flashpoint of the mind. If we are to survive, we need to pursue rewards and avoid risks as quickly as possible. Limbic structures like the amygdala (ah-MIG-dah-lah) and the thalamus snatch up sensory inputs like sights and sounds and smells, then help evaluate them on a basic scale from “bad” to “good” with blazing speed. Those evaluations, in turn, are transformed into emotions like fear or pleasure, motivating your body to take action.”
Guess where many of those glutamatergic neurons I discussed ad nauseam project to? Yup, right to those limbic structures that Zweig mentioned that form the System 1, or the reflexive portion of the brain. This includes the striatum, amygdala, and thalamus as seen in this picture.
When you think about it, the ability to modify our most ancient responses is vital to our survival. Back in caveman/cavewoman days, it was essential we learned where and when predators attack, and we had to adapt our System 1 to be activated based on what we learned. It is through this mechanism that we can adapt System 1 so that we increase our risk tolerance and become better investors.
More information here:
6 Ways to Increase Your Risk Tolerance
Back to Jim’s Advice
Now that we have reviewed the above neurology, we can see how Jim’s advice works in our brains to increase our risk tolerance.
- Understanding market history involves glutamatergic neurons originating from the frontal lobe (which is the part of the brain that does higher cognitive processing, like studying market history) that synapse on the amygdala, the brain’s fear center. This pathway will be activated and solidified so when you see the S&P tanking, your reaction will be, “Ehh, whatever.” Glutamate secretion on the amygdala will mute its fear and get-out response. Without knowledge of market history, a tanking S&P will set off your amygdala with a vengeance and cause you to react and sell.
- Not looking in a downturn is also a learned behavior where now your glutamate pathways are dumbing down the signals from both your amygdala and nucleus accumbens, reinforcing an “I am not gonna look” response. You might already know that the nucleus accumbens is the reward center, so why would this structure be involved in a market downturn? In Zweig’s book, he mentions, “. . . the possibility of loss makes the hope of gain even more tantalizing.” The temptation to look at the market on our phones is a double-teaming of amygdala and nucleus accumbens signals. If you force yourself not to look, you will activate glutamate neurons to learn to decrease this temptation signal.
- Putting on handcuffs in the form of a written plan reinforces glutamate neurons to stop the output from your limbic structures—almost like a hard stop.
- Investing in less liquid assets is a way to avoid activating emotional limbic structures to begin with.
- Needing the money less dumbs down the response of the amygdala in response to market downturns. The glutamate neurons connecting to the amygdala will downregulate its response to a market downturn, because you learn there is no immediate danger when you have no immediate need for the money.
Additional Ways to Increase Risk Tolerance, Rikki Style
I have taught myself additional techniques to increase risk tolerance, utilizing the neural pathways above.
- Gamify staying in the game. During bear markets, I think of falling markets as a game where I don’t sell. In fact, I have fellow white coat investors who I “compete” with to see who can stay invested and not sell. I text my friends bragging that I am not selling during a bear. In fact, I brag about putting more money in! This can be a powerful way to increase risk tolerance because, again referring to Zweig, “Researchers have found that when players do well at a video game, the amount of dopamine released in their brains roughly doubles, and that this surge can linger for at least a half-hour afterward.”
- Reward yourself during a bear market. During a bear market, I start performing activities that bring a sense of well-being so that I associate good feelings with the bear. I text my aforementioned WCI friends, “Stocks are on sale! This is awesome!” I go out with my friends to hang out and celebrate. I go out for a nice dinner. I text my wife that I love her. I give my children hugs and kisses. I watch Wedding Crashers. Now, you might think this is utterly stupid, but so is selling during a bear market. Just like Pavlov’s dog, I am rewiring my brain to a stimulus, so now my natural reaction during a bear market is a sense of happiness, excited anticipation, and well-being. I am salivating when I hear the bell, not when I see the food.
- Visualize not attaining your goals. If you sell during a bear market, there is a risk of not just monetary loss, but the loss of attaining your goals. Basically, you are teaching your brain to piggyback on loss aversion with this technique. Instead of the red S&P line moving straight down activating your amygdala and tempting you to sell, your amygdala will fire when you try to hit the sell button as you visualize not retiring, having to work until you're 90, and staying in debt until you hit the grave.
- Think of a bear as a jackpot! This technique piggybacks on our System 1 activation of the nucleus accumbens during an anticipated reward. This is the main reason we gamble, with the potential of a huge win. Well, we know when the market tanks, it will eventually go back up (with a long enough time horizon). And I can’t wait until it goes back up! Now, every time I see a bear market, I picture how it will go back up, neurologically having my glutamate neurons communicate and activate my nucleus accumbens.
- Remember you only lose money when you sell. Though technically you do lose real money when your investments go down, you actually have to sell your stock index funds to lock in the loss. Framing it in your mind that you only lose when you sell low, you have taught your brain to activate your amygdala before hitting the sell button, again utilizing loss aversion to your advantage.
More information here:
My Financial Plan Calls for Me . . . Being Hung by My Fingernails????
Can I Really Fool My Brain When I Know I’m Fooling It?
You might be asking yourself, “How can I fool my brain if I know I’m trying to fool it?” It's kind of a philosophical question, and like all higher-level questions, it relies on the System 2 part of our brain. What we are doing here is modifying System 1, the automatic circuitry that has no capacity to acknowledge that it is being fooled with but, at the same time, has such a powerful emotional influence to overcome System 2.
This is not a novel concept that we are utilizing to make us better investors. Any complex learned task—such as learning to ride a bike, taking up a new sport, or studying how to paint—all are using System 2 circuitry to modify System 1 circuitry. With time, there is no System 2 but only System 1 when you jump on that bike, when you place your hands catching that football, and when you hold that paintbrush. And with time, there will only be a System 1 celebratory dance when you see VTI tank 90%.
(For those of you who are closer to retirement, your System 2 will eventually kick in and then you freak out. But then again, your System 2 should have made sure your asset allocation was appropriate for your risk capacity. But I digress—that’s fodder for another post.)
There you have it. These are the ways to increase your risk tolerance and how the dynamic circuity in your brain makes risk tolerance modification possible. This may not be as important to those whose need to take risks is fully aligned with their risk tolerance. But for those whose risk tolerance is below the actual risk they need to take to accomplish financial goals, these techniques can be very powerful to get through bear markets with a riskier asset allocation and lead to their desired financial destinations.
And if you were skeptical that risk tolerance is modifiable, I hope I proved, supported by neurological evidence, that it is not set in stone.
What do you think? Is risk tolerance modifiable? Do you agree with the proposed science behind risk tolerance? Comment below!
Enjoyed the article, and re-visiting the brain structures had me thinking back to medical school!
I was proud of myself that I didn’t look at my 401K until last week–it was down a lot, but it didn’t bother me as much as I thought it would.
Maybe I’m older and wiser???
Who knows…
Thanks again for the article
DG
glad you enjoyed thanks!
I agree overall with this. However, I
Think that ignoring what is going on might not necessarily be the best approach either.
It became evident several months ago that the market was in for a major slowdown and that some structural issues at the world wide level would make it a long term trend. While I did not touch my existing assets, I did change the investment choices of my ongoing contributions to reflect that.
You may be missing the point. What you are describing is market timing (lightweight market timing to be sure, but still market timing). You may have had a hypothesis that turned out to be true, but if it was truly “evident several months ago” that the market was going to move in a certain way, then Wall St would have reacted to that information within minutes (if you don’t believe me, I’ll refer you to the market response to the “leaked” November CPI report). Rikki’s whole premise (to my understanding) is that you cannot control or predict market action but you can control your own action.
If you know there’s a long term downward trend, why didn’t you touch your existing assets? That’s silly.
The reason why, of course, is that deep down you know that you don’t really know what the future holds. So you made a few bets about it. Maybe you’ll be right, maybe you won’t. It’s tough to predict what is going to happen in the future, especially when you need to get the timing right (twice) too.
yeah dude actually I don’t advocate ignoring what’s going on for everything per se, just the day to day market stuff. I think keeping your goals in mind is something that you should never ignore, and as I mentioned above it can help you stay in the game if you visualize your goals and the fact you might not attain them if you sell low.
If in order to attain your goals you think you have to keep an eye on the day to day and short term market fluctuations, then have at it hoss! There are many roads to Dublin and my and the majority of WCI investors of buy and hold and keeping the same asset allocation is not the only way to reach your goals. Just make sure you watching the market and doing some timing is written in your financial plan and you’re not letting emotion get in the way. I would bet you your nucleus accumbens was firing earlier this year while you were watching the market and that was the basis of you changing the allocation of your investments. I highly doubt that you had written in your financial plan a way to identify “major slowdown and that some structural issues at the world wide level would make it a long term trend” as you say.
Careful with that smart brain of yours! As docs, we are are so smart that we can rationalize anything making our hindsight bias superstrong!
I think this can be dangerous advice when looking at a longer term global historical perspective. Certainly there are many instances of multi decade drawdowns. Do you really want to live through a prolonged drawdown when it could be avoided by having a data dependent process?
Have the tailwinds of a 40 year bond bull market ended? Will the dollar lose its hegemony?
Buy and hold is easy but may not work as well going forward.
Check out the “Allegory of The Hawk and Serpent” by Christoper Cole at Artemis Capital for a deeper dive…
https://artemiscm.docsend.com/view/taygkbn
Best wishes!
This is what I’ve been trying to tell others, including Jimbo. I’ve even told him why buy and hold won’t work. It’s an interesting thing, because “indexers” ignore what Bogle saw and predicted, and it’s about to happen. They also think that others don’t adapt to “markets” which is another reason why buy and hold won’t work – according to their own rationale.
I’ve told people what to be in, so I do have solutions. Chris Cole is a very smart man, Dan, but it’s hard to be in trades (or holds) like “long vol” etc for the average or retail investor.
People have been saying buy and hold doesn’t work for eons, and yet it just keeps working. Maybe some day the naysayers will be right, but it hasn’t happened so far. I’ve heard “it’s different this time” many times before.
You don’t understand what IS different, apparently, this time. I’ve been trying to tell you. What you are saying is not what you think it means – pertaining to me.
That’s why I’m short on the markets and have been killin’ it. It’s going to keep going. Many things are different this time, is the point. The bulls are the ones that “it’s different this time” crushes, not what I’m saying, Jimbo.
Maybe. We’ll see I suppose. But some anonymous dude on internet always claiming to be able to predict the future and invest accordingly isn’t going to cause me to change a well thought out plan.
By the way, most people don’t like being called names like “Jimbo”.
Buy and Hold does work if we can control that thing we have at the top of our heads called a brain.
There is incredible amount of evidence that buy and holding low cost index funds should work, and when it doesn’t it’s only for the reason I mentioned in my article. Our brain are just not wired right for buy and hold, so let’s rewire it!
The fun thing about the word may is that you can put it into just about any sentence and have that sentence be accurate. But the real question is what is the probability that something that has worked ever since records were kept will stop working? Probably not very high. Not sure I’d bet that way.
I think data dependence is perhaps a fancy way of suggesting an investing algorithm. If I’m not mistaken “data dependence” was part of the downfall of Long term capital management as well as the housing bubble-turned-crisis. “Nobody defaults on their mortgage” they said.
Have the tailwinds of a bull market ended? Sure have, but the bull market was about the last 15 years, prior to that about 20 years, etc. The biggest risk to U.S. investors would be suspension of our financial system, the groundwork of which derives from individual property ownership and English Common Law. Absent that, perhaps loose monetary policy and inflation?
What other currency do you propose that nations and entities use to transact? Pound sterling? Yen, eurodollar, ruble, yuan? None of these has the confidence of that held by the dollar. We can surely play the what-if game and beat almost any investing framework into the ground. What investing framework do you propose?
Hey Dan thanks for reading despite writing for a financially driven blog, I am just a doctor, and my data driven processes relate to patient care, and I do not have the time nor the inclination to focus on a data driven process for investing in order to fund my retirement. Buy and hold low cost index funds is the perfect solution for me! and yes, this advice on how to control your behavioral biases is for the buy and hold investor, but I think it can still be applicable even if you are using a data driven process. Imagine if your data driven process, like for example momentum or trend following, led to huge short term losses? your amygdala would be screaming to throw out your data driven process.
I agree with all this except with the point that ‘you only lose money if you sell’. It’s a common misperception, but it’s absolutely false. Your investments lose value when the market goes down, period. You can try to use a Jedi mind trick on yourself to think otherwise, but it’s true. People who have held GE stock since the stock peaked in the year 2000 have lost 83% of the money invested in it, less dividends they collected along the way. And those who’ve held Tesla for the last four years have more than quintupled their money. Selling simply means that you have realized a gain (or loss), but that gain (or loss) happened with the market value of your investment went up (or down). We don’t get to wave a magic wand and convert losses to gains by just not selling. And we would never tell someone with $10 million of stock that they paid $1 million for that they ‘haven’t gained anything until they sell’.
thanks for reading and you are absolutely right, “you only lose money when you sell” is a Jedi mind trick to get you to not hit the sell button, and fooling yourself into thinking that the market will always goes up ignores the risk premium you get for investing in stock in the first place. But your amygdala doesn’t know that! whatever works to get us now to hit the sell button!
I am in agreement with you. While if it helps someone not sell low, I like the mental trick, the truth is that when the value of your stocks, bonds, and real estate go up, you really do have more money and when they go down, you really have lost money.
All selling does is trigger some tax consequences (either a usable loss or a taxable gain) and prevent further gains or losses.
Might be worth a blog post. This mentality can do harm, for example people don’t tax loss harvest or hold on to bad investments because they think if they just hold until it comes back up they won’t have lost money.
Jim, I agree that this mental ‘trick’ can be helpful to buy-and-hold investors who are trying not to panic sell, and I also agree it can certainly lead to some VERY bad decisions, such as the one you pointed out where an investor is holding individual stock. While there is no guarantee that the U.S. stock market will recover from a drop in your lifetime, the probability of a single stock dropping and never recovering is MUCH higher. Tricking yourself into thinking that you haven’t lost anything from a single stock holding plunging in value is likely to do more harm than good.
Another potential pitfall of this mindset is that it can lead an investor to irrationally chase dividends since the investor isn’t concerned about the price of the security falling as long as they don’t sell.
Thank you, Rikki, for the unique Neuro-Finacial take. Now I know which transmitter to blame. The points you introduced are healthy and practical. Some of the comments to your article have got me excited.
“Remember, you only lose money when you sell” and the corollary that you only gain money when you sell ARE true and need no mind trickery to accept as such. Also, in the discussion, the virtue of the “buy and hold investing” as well as the “long term value of holding a depreciated stock with dividends” have got challenged with broad strokes. These are key nuanced principles of investing. WHAT and WHEN you buy mostly decides how these rules play out. If you were trying to catch a falling knife, then holding it for long may not be good and no dividend reward may be worth the bleeding. Catching the fewest falling knives is where one wins.
Conflating money and value is a problem and I should make myself clear. If used interchangeably, then we start to think that a drop in “value” of a stock is a loss in “money”. Not so if I am going to treat “money” like cash in my wallet or $$$ sitting in my savings account – ready for use. I contrast that with “value” which is the sum of the undulating greens and reds of all the holdings in my portfolio. I see them, I can’t touch them, I can’t use them yet. Gain or loss, I know they are NOT real until I sell, and once sold, I count what arrives in my wallet. But to say a loss in the value of a stock amounts to a loss in money or the appreciation of a stock is someone’s wealth before the sell is fair for overall discussion but become a tricky discussion when the rubber meets the road.
Many may not know Microsoft as the once most beat up and stagnant stock on the market (2000 – 2013). Apple also had its frustrating years before the iPhone showed up. The horrific days of these two present day darlings may be encouraging for the likes of GE and IBM and also highlight some of the important market principles the article/discussions touched on.
The fact that the gain in the value of a portfolio is not real is an easier concept to grasp than the loss in value though they are very related concepts. With appreciation, a $100K gain on paper may quickly shrivel to $45K when you cash out. It depends…
What you see as a value gain on paper is not really yours UNLESS you are the rare lucky person who has all appreciations skillfully tacked away in a Roth and you time your sale at the precise moment where you stock peaks. In this very rare case, indeed the increase in value = increase in money. I have tried my luck at this unicorn for decades and it does not work this perfectly most the time.
To appreciate the real fate of an appreciated stock, seeing the more common scenario of a value gained in a taxable account is helpful. If you have $100k appreciation in a stock, are you really $100K richer? Absolutely NOT! Only some part of that appreciation is your real money. Ask Elon Musk who has a lot of appreciated value but is having a hard time accessing it.
A common challenge for many of us will be that when you sell an appreciated stock with $100K gain, taxes will claim 15 – 55% of that gain. Your loss will be dependent on how long you have held the stock (short/long term gain), where you leave (state tax or not) and your total income (ACA 3.8% surtax). If you are a wealthy Californian who has held the stock short term, then of the $100K value gain, you will go home with only $45K of money. Certainly, you can be from a 0% tax state, hold it long term and squeeze under the 3.8% surtax. So, there is a great spread in your gain.
Another loss in converting value or paper gain to cash arises from the feared market unpredictability. Appreciated value of the stock today may be different tomorrow and nobody’s prediction is valid all the time. Again, talk to the Elon Musk from Dec 2021 and the one from Dec 2022. To collect ~ $30 billion cash, he has “incurred a loss” of ~ $125 billion to his portfolio. The fact is, Elon NEVER had that $125B imaginary “money”. He never had $300B either. Never! Once you sell the appreciated/depreciated value, what you have on you, the $$$, is the only real thing you have.
How about the loss in the value of a portfolio? When is that a real loss? The Sensible Steward has contrasted 2 stocks to make a point about the impact of paper loss/gain – GE and TSLA. Note that GE is a stock past its prime and TSLA is a woefully overvalued stock that is enjoying its novelty until the market catches up. These two tell a very skewed story. Microsoft (MSFT) and Apple (APPL) from the exclusive Trillion Club I think balance this story better. Long term market trend will show that it is critical to be careful WHAT (economical moat) you buy, then “buying and holding” as well as knowing “you only lose money when you sell” decides the market success.
Like GE, MSFT lost 70% of value during the dot-com bubble. For the next decade, MSFT pretty much sat at a price of ~$30 and frustrated many. Any money lost here? Not yet if you were not agitated by the “value loss” and ended up selling and walking away. If you sold and walked away in those 10 years, then you would have lost out on the 1000% gain that followed. Less dramatic but as pertinent is APPL. APPL lost 30% value in 2012 as many thought the company had its peak days with Steve Jobs and no more. The stock value languished for 2 years. But no money was lost if you didn’t sell. How you treated that value loss on paper and how you reacted went on to determine if you were part of the phenomenal 1000% gain that followed.
Of course, APPL and MSFT are vastly different from GE in that they have a formidable “economical moat”. Certainly, there are many stocks that fall in-between.
It is particularly good to have such diversified and balanced view of economical moats, beaten down stocks, long term market trends, and outcomes of paper loss to appreciate the very nuanced and invariably true rules in investments.
Thanks for your lengthy comment. As noted above, I disagree with the idea that appreciation and depreciation are not real unless you sell. Just wrote a blog post about it actually. This is particularly the case with a publicly traded stock. Elon Musk doesn’t have trouble accessing his wealth “tied up” in Tesla. Heck, he used a bunch of it to buy Twitter.
Right, the idea that someone with $100 million (or any number you want to use) in stock but no cash is ‘broke’ or any such thing is patently ridiculous. And for the same reason, the person who bought a stock for $100 a share that’s now trading at $1 a share hasn’t lost anything if they don’t sell is similarly fallacious.
It becomes obvious when you carry it to extremes, doesn’t it?
The discussion here was not that a person who once had $340 B is tight for cash. But rather than he does not have access to the full “value” that is attributable to his portfolio. The only money you know he has is what he is holding after the sales. A point of fact, Elon has now been cornered not to touch any TSLA stocks for 2 years (as of Dec 23). Does he really have full access to his “wealth”?
Pertinent to the rest of us, the point with gains was that paper wealth or appreciated portfolio should be interpreted in the right context (what cash it will yield) before one assumes a woefully inflated wealth and gets overleveraged.
“idea that someone with $100 million in stock but no cash is ‘broke’ or any such thing is patently ridiculous.”
Respectfully disagree! Not ridiculous. It is just an ugly fact.
If the $100 million worth stocks were in APPL, JNJ or HD, we agree that you may be doing ok – you can access at least part of the paper wealth.
Now if your $100 million was in Enron, Lehman Brothers, Radio Shack or Circuit City, you were dead broke while your value on paper was in incredible millions. Many multimillionaires of these latter entities got irreparably broken not only because they had tough luck with investments, but they also assumed the “$100 million” was real and got leveraged elsewhere. Pure fallacy in the value of paper wealth!
Add Robinhood’s liberalization of stock trading and meme stocks, we have a lot of penniless “wealthy” stock owners out there.
If you sold before Enron went to zero, you had $100 million. Then you lost $100 million. The gain was real and so was the loss.