alt Hacker NewsOne of the simplest ways to measure risk in stocks, bonds, crypto, mfs etc for ordinary people is Maximum Drawdown. Once you understand how it works, it takes the stress out of making and managing your own portfolio P — espexially your non retirement account. The question you have to ask your self is: "Given some portfolio with returns of X%, am I ok with this asset being down by Z% over T years — i.e the _computed/inferred_ drawdown?" If the answer on one end is no I cannot afford P to have any drawdown at all, then just put your money in a cash/MMF and call it a day. Generally people are ok with some risk on some percent of P and stash the rest in cash, and you _risk adjust_ for Z and T. The portfolio choices are surprisingly simple.
No other question matters. There are some risks but the key element is the understanding of the statistical variance because that allows me to say that "ok 50% of P can afford to be down for 3 years and I won't be homeless".
Most people don't know this but most money managers(managing money for ordinary Americans) that you hire compute this number _once_ and make tiny adjustments to your portfolio(I am talking once a year maybe) and take 1-2%.
I follow this guy called Dave Stein who has a B2C product called money for the rest of us that taught me this. I am not affiliated with them in any way.
I think the posted article is also the description of America's labor market. Many people don't use it on a day today basis and most people cannot engage their system 2 to assess risks over a few weeks out, let alone 5-10 years.
But I found This is a real practical everyday example of why statistical uncertainty is important to know about. It teaches you how to compare — risk adjust — two vastly different investments e.g. BTC vs S&P or indexing vs value strategies. Then you sleep at night.
It is also not intuitive and many people are very anxious and FOMO driven when it comes to money. So you need to internalize the idea for it to sink.
The drawdowns are a statistical measure and you could be unlucky to catch a big depression style thing once in 30 years. And T is typically longer than 5 years, typically 10 or more.