Now we've all had a little reminder over the last few weeks of what it feels like when Mr Market smacks us in the face with a loss, I think it's an excellent time for everyone to assess how they truly feel about their losses. Are you indifferent? Maybe it's made you slightly stressed, a bit edgy about the future? Or are you constantly checking your account and wishing you had done something before the losses piled up?

Considering your current frame of mind, what do you honestly think your feelings would be if we had a sudden further market drop of 30 percent? If you have an average 60:40 portfolio, that's going to show up as a massive 18% drop in your wealth. If that really concerns you or possibly makes you feel queasy, it might be a good indication you need to think about derisking some of your equity holdings into short bonds or cash and cash equivalents like treasury bills.

But before you pull the trigger, might it be prudent to think through your situation? Especially if you're in retirement and drawing from your portfolio for everyday living. Take the 60:40 portfolio as an example. You probably have at least 10 years of spending needs already pretty well insulated from our hypothetical 30% equity drop, sitting safely in your bond and cash allocation.

Although it's simple finance 101, during a big downturn this fact gets overlooked in the panic of the moment. By switching where you draw living expenses from—prioritizing your bond and cash allocation—you're not selling distressed assets from your equity holdings. You're letting them recover while your portfolio does exactly what it was designed to do: protect you.

Ultimately, these thoughts serve as a crucial reminder that risk management is not a knee-jerk reaction, but a calm, calculated process. While the feeling of being smacked in the face by the market is a powerful prompt for reflection, the most prudent response is always a pause. Before you radically derisk out of fear, take the time to evaluate your emotional tolerance and your portfolio's practical ability to weather the storm.

If you have a bond and cash buffer protecting your immediate needs, you're already insulated. By prioritizing calm thinking over panic selling, you avoid turning a temporary market dip—be it 6 months or 6 years—into a permanent loss, ensuring your long-term financial strategy remains intact and aligned with your personal goals.

Always remember: equity losses are nothing more than numbers on a screen until you sell and crystallize them in the real world. Don't let Mr Market bully you into making that mistake. Use your bonds and cash as designed, stay the course, and let time do the heavy lifting.

The post Don’t Let Mr Market Bully You: A Gentle Reminder of Your Built-In Protection appeared first on HumbleDollar.