A common practice among financial advisers is to run through a risk questionnaire with new clients. These questionnaires tend to ask investors how they might respond to certain hypothetical market movements – a correction, say, of 20 percent or more. As Morgan Housel points out in this (excellent) interview, rather than extrapolate out from what will typically be the relative calm of the current environment, investors – and their portfolios – might be better served in preparing for tough times ahead by recalling their emotional responses to prior incidents of heightened market volatility. Memories of a hard reality are far more tangible than speculations about future travails.
