A good litmus test for how much risk/volatility you can stomach is reviewing market extremes and seeing how you handled your portfolio during that time. Even if you weren’t investing at the time, contemplating how you may have handled things can be a useful exercise, although the former is a much more reliable indicator than the latter because you actually experienced the pain of the declines.
If you sold at the bottom and did not return to the markets for some time it is likely that you were invested too heavily in equities. This overweight position caused declines too great for your level of risk/volatility tolerance.
It is important to know your own limitations so you can avoid the investing behaviors that lead to permanent portfolio losses. A more diversified portfolio would have declined less, causing less anxiety and allowing you to avoid selling at the most inopportune time.
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