1.8 · Risk: what you're actually paid for
Why this lesson
Section titled “Why this lesson”You now own things that can fall in price — which means the next bear market will administer an exam whether you studied or not. Most investors fail it not because they lacked information but because they never rehearsed: they discover their true risk tolerance live, at −35%, with a finger on the sell button, converting a temporary drawdown into a permanent loss at the exact moment the math said hold. This lesson is the rehearsal.
It also completes your scorecard. “Drawdown,” “liquidity,” and half of “total expected return” have been placeholders since lesson 1.1; today they get filled with real numbers by asset class. And it installs the last Level 1 filter — asymmetry — which quietly disqualifies most of what you’ll be pitched for the rest of your life. The two hurdles ask “does it pay enough?”; asymmetry asks “what do I lose if I’m wrong, versus what do I win if I’m right?” Both questions, every time, forever.
Ben Felix for the concepts, PensionCraft for the measuring tools.
Watch for:
- 01:00 — total loss vs volatility: for a globally diversified portfolio, permanent total loss requires an economic catastrophe; for a single stock it just requires one bad company.
- 02:00 — Fama-French: ~36% chance stocks lag T-bills over any one year — and still ~4% over 30 years. Equity returns are compensation, not a schedule.
- 06:30 — positive skew: from 1990–2018, 1.3% of global stocks created all net wealth above T-bills; 61% of companies destroyed wealth. The case for owning all of them (lesson 1.5) restated as risk math.
- 08:30 — the quiet headline: over decades, inflation is the biggest risk — the “safe” asset class (bonds/cash, ~1.9% real historically) barely outruns it, while stocks’ ~5% real is the payment for enduring the ride.
Watch for:
- 01:00 — the return “bucket” distribution built from 33 years of daily FTSE data.
- 03:00 — volatility’s blind spot: it counts up-moves and down-moves the same.
- 04:30 — tail risk: days with >5% falls were 0.2% of all days — and caused a cumulative 70% of losses.
- 06:00 — max drawdown on the pound’s post-Brexit fall (−22.8%): peak, trough, and the long climb back.
Volatility is the fee; permanent loss is the accident
Section titled “Volatility is the fee; permanent loss is the accident”Volatility — how much an asset’s price wobbles around its path — is not damage. It’s the fee the market charges for equity-level returns, paid in discomfort rather than pesos. A diversified index that falls 30% and recovers took years off your calm, not your capital. Permanent loss is different: capital that never comes back. It has exactly three main causes — a concentrated position that fails (the company, the coin, the “sure thing”), fraud (lesson 0.4’s entire subject), and selling a temporary drawdown at the bottom, which converts the market’s fee into your loss, voluntarily.
That third cause is behavioral, and it’s the one you control. Felix’s compensated/uncompensated frame tells you which wobbles pay: market-wide risk is compensated — you can’t diversify it away, so its price (higher expected return) is paid to whoever holds it calmly. Single-name risk is uncompensated — diversifiable, so the market pays no premium for it; carrying a one-stock portfolio is volunteering for risk with no wage attached. And the positive-skew stat makes it brutal: with 1.3% of stocks creating all the excess wealth, a concentrated picker’s most likely outcome is holding the 98.7%.
The drawdown table
Section titled “The drawdown table”Max drawdown — the worst peak-to-trough fall — is the risk number your gut actually meets. Learn the table by asset class, because these are normal events, not surprises:
| Asset class | Normal-decade max drawdown | Notes |
|---|---|---|
| MP2 / RTBs held to maturity | ≈ 0 | Principal doesn’t mark to market for you; the “drawdown” is opportunity cost and inflation |
| Bond funds | −5–15% | Rise in rates = fall in bond prices (you met the seed of this in 1.4) |
| Global diversified equities | −30–50% at least once a decade | 2008: ~−50%; 2020: ~−34% in a month; both fully recovered — for holders |
| Single stocks / one-market bets | −50–90%, sometimes forever | Uncompensated; recovery not guaranteed — some never return (the PSEi’s decade is the local exhibit) |
| Crypto | −70–90% per cycle | A 3% “yield” on an asset that halves is not income; it’s a rounding error on the drawdown |
Two pieces of arithmetic make the table stick. First, recovery math is asymmetric: −50% needs +100% to break even — losses hurt more than the same-sized gains help, which is why variance drain (the gap between average return and what you actually compound; a +50%/−50% pair of years “averages” 0% but leaves you at 75) makes wild assets compound worse than their averages advertise. Second, the 2008 worked example from lesson 1.5’s videos: $200k → $119k → $364k. Both sequences are the same asset; which one you experienced was decided entirely by whether you sold.
Risk tolerance, honestly defined, is the largest drawdown you can hold through without selling — measured in pesos, not percentages, because “−40%” is painless and “₱1.2M of my family’s money gone on paper” is not. You calibrate it in the Do-it below, on your own numbers, before the market does it for you.
The liquidity spectrum and the asymmetry filter
Section titled “The liquidity spectrum and the asymmetry filter”The liquidity spectrum. Liquidity is time-to-cash at fair value — and every asset you’ll ever own sits somewhere on one line:
savings (instant) → stocks/REITs (T+2) → RTBs via secondary market (days, price risk) → MP2 (5-year lock) → property (3–12 months, big spreads) → private business stakes (6–24 months, if ever)
Two rules govern it. Illiquidity must be paid for: if a locked asset doesn’t out-yield its liquid twin, the lock is a pure cost (MP2’s tax-free premium over deposits is exactly that payment; a 5% pre-selling condo versus a 5.5% REIT is exactly its absence). And liquidity is bought before it’s needed: the emergency fund (1.3) exists so the illiquid end of your spectrum never has to be cracked open early at fire-sale prices. The FOO’s dependency graph, one more time, now in risk language.
The asymmetry filter. The last tool, and the sharpest. For any pitch, estimate both tails: realistic downside if wrong versus realistic upside if right, with rough probabilities — the expected value habit (probability × outcome, summed). Then demand asymmetric risk-reward of at least 3:1 upside-to-downside before capital moves. Symmetric bets (risk ₱1 to maybe win ₱1) are casinos with extra steps; negative-asymmetry products — capped upside, uncapped downside — are most of what’s sold loudly (leveraged “sure things,” yield plays where the best case is the coupon and the worst case is the principal). The filter also explains this course’s roadmap backwards: index funds pass on time-horizon math (bounded drawdowns, uncapped compounding), a foreclosure at 60% of value passes by construction (Level 3), and your agency — where effort multiplies equity — passes hardest of all (lesson 0.3’s whole point). A survivable downside is non-negotiable even at 10:1: no expected value justifies risking the rungs that keep your family fed.
Three rehearsals, all on paper, all with your real numbers:
- The drawdown rehearsal. Take your actual portfolio (floor + MP2 + whatever 1.6/1.7 deployed) and write the −40% equity scenario in pesos: each holding’s value, the total, and the sentence “this is normal, this is the fee, my plan is to keep buying.” Then write what you would actually do — honestly. If the honest answer is “sell,” your equity allocation is too big for your current tolerance: resize now, on paper, not later, in panic.
- Map your liquidity spectrum. Every peso you own placed on the line above, with its time-to-cash. Check: can you reach 6+ months of expenses without touching anything right of “days”? If not, the floor needs finishing before the capstone.
- Run the asymmetry filter on one live pitch. Take anything you’re currently being offered (there’s always something). Write downside-if-wrong, upside-if-right, rough probabilities, the ratio, and the verdict. File it with your 0.4 advisory autopsy — the armor now has a quantitative layer.
Check yourself
A diversified global index fund falls 35% in a crash. In this lesson's terms, that is:
Why does the market pay you nothing extra for single-stock risk?
The normal-decade max drawdown to expect from diversified equities, and from crypto:
After a −50% drawdown, breaking even requires:
MP2's 5-year lock is acceptable on the liquidity spectrum because:
The asymmetry filter demands, before capital moves:
Per Felix, the biggest risk over multi-decade horizons is:
You can move on when… your written −40% rehearsal exists with an honest verdict (and a resize if needed), your liquidity map covers every peso, one live pitch has been through the asymmetry filter on paper, and you can explain compensated vs uncompensated risk and variance drain in your own words.
Go deeper
Section titled “Go deeper”That’s the last lesson of Level 1. The gate is waiting: the Level 1 capstone — deploy the starter allocation with the math written down, and check yourself against the rubric honestly.