Loss Aversion is the Constraint
The portfolio you abandon is the portfolio you do not own. Most investors aren't trying to beat the market—they're trying to avoid the one catastrophic mistake that changes their trajectory.
Philosophical note for veriolab.com. Educational only. Not investment advice.
A story that repeats
There is a moment that happens in almost every significant drawdown.
It is not the initial drop. Most people can handle that. They remind themselves this is normal, that they have seen worse on charts, that staying the course is the right thing to do.
The moment comes later. Usually around day 15 or day 30 of a grinding, ugly market. The news is relentless. Friends are texting about what they sold. Your spouse asks a question that sounds casual but is not. You sit down to check your portfolio one more time and something shifts.
The number on the screen stops being abstract and starts feeling like something you are losing.
That is when decisions get made. Not good decisions. Decisions that feel like relief in the moment and regret six months later.
The space between knowing and doing
Everyone who has read a single book on investing knows you should not sell at the bottom.
The problem is that your nervous system did not read the book.
When you are in a drawdown, your body does not care about mean reversion or historical analogies. It cares about threat. And threats demand action. Sitting still while something bad is happening feels fundamentally wrong. Selling feels like solving.
This is why smart, well-read, financially sophisticated people still make the same mistake. The failure is not intellectual. It is emotional and physiological. And you cannot reason your way out of it in real time.
Two portfolios, same destination, different experience
Imagine two investors who end up in exactly the same place after five years.
One of them took a path with modest volatility. Down 12% at the worst point, then steady recovery.
The other one was up big in year two, down 40% in year three, then clawed back. Same ending value. Very different journey.
The second investor had to hold through the part where their brain was screaming at them to do something. Had to sit in meetings pretending to focus while mentally calculating what they had "lost." Had to answer questions from family. Had to resist the urge to make it stop.
On a spreadsheet, the two paths have equivalent ending net worth. In a life, they are not even close.
What protection is really for
Sometimes a hedge reduces the drawdown mechanically. The position pays off, you have liquidity, the math is better.
But often, the deeper value is something harder to quantify.
Knowing the hedge exists can change your relationship to the portfolio. It can give you permission to wait. It can quiet the part of your brain that wants to act. It can be the difference between holding through the bottom and doing the thing you will spend years wishing you had not done.
This is why "did it make money" is sometimes the wrong question. The right question might be: did it help you stay?
The part nobody wants to admit
Most investors are not trying to beat the market.
They are trying to:
- avoid the one catastrophic mistake that changes their trajectory
- keep their family stable while the world feels unstable
- look back in 20 years and not have a story about the time they panicked
If you talk to someone who sold at the bottom of 2008 or March 2020, they rarely say "I made a rational decision based on new information." They say something closer to "I could not take it anymore."
That is the constraint. And you design around it or you pretend it does not exist.
Questions worth sitting with
- What is the largest drawdown you have actually lived through, not read about?
- When you were in it, what did you want to do? What did you actually do?
- If you could pay a small annual cost to reduce the chance you make that decision again, would that be worth it?
- What would acting in a position of strength, not weakness, look like?
Takeaway
We are not trying to convince anyone that hedging is required. Some people can ride volatility without flinching.
But if you know how you tend to respond when things get loud, it might be worth building a program that accounts for that instead of assuming you will be different next time.
The portfolio you abandon is the portfolio you do not own.
Verio Labs provides modeling, analytics, education, and strategy development. We are not an RIA, broker-dealer, or CTA. We do not manage assets or give trade recommendations.