The Warning Signs Were There
I have been saying this for a while now. Things were going to get rocky. Things were going to get volatile. And here we are. The Federal Reserve, GDP reports that nobody wants to talk about honestly, hedge funds imploding left and right, and now the Korean stock market down roughly 45 percent in about 45 days. This is not happening in a vacuum. These are connected dots, and if you’re not connecting them, your portfolio is going to pay the price.
Let me be direct with you. The question right now is not whether markets are volatile. The question is whether your portfolio was ever actually built to withstand volatility in the first place.
What Happened in Korea Is a Warning for American Investors
I want to spend a moment on Korea because it matters to you even if you have zero money invested there. What happened over there is a perfect case study in what leveraged financial instruments do to ordinary people when markets turn.
- Nearly 4 percent of Korea’s investing population had accounts wiped out due to margin and leverage
- A Korean index fund that tracks their entire market at three times leverage is down over 80 percent
- More than 700,000 individual investors were completely wiped out
I hate seeing that. I genuinely do. But here is the brutal truth. The same financial instruments of mass destruction being used over there are being used right here in American markets. We have called these things out before. The term I like, borrowed from Ben Hunt, is gain of function financial instruments. They are engineered to amplify returns in good times and absolutely devastate investors when things turn. And they are everywhere.
The Hole Gets Deeper When You Keep Digging
When I started Markowski Investments, a significant part of what we did early on was rebuilding accounts for people who had been ripped off by boiler room operators. People who were down 50, 60, sometimes 70 percent or more. And the hardest conversation I had to have with those people was this one.
The thing that got you into this hole? You cannot use that same thing to dig yourself out.
I would sit across from someone who had been devastated, and they would say they needed to make it back fast. They wanted to go right back into the same high-risk, high-leverage strategies that destroyed them in the first place. And I had to look them in the eye and explain that recovery takes work, time, and patience. The same qualities they should have applied before the losses happened.
That is a hard conversation. But it is the honest one.
What You Should Be Asking About Your Portfolio Right Now
If your portfolio is taking hits right now, here are the questions you need to be asking:
- Is my portfolio leveraged? Either directly or through instruments that use leverage internally
- What is my actual risk exposure? Not the risk tolerance questionnaire version, the real version
- Am I positioned for a prolonged period of volatility? Because I believe that is exactly what we are in
- Do I have a plan that does not depend on markets going straight up? Because that environment may be behind us for a while
Nobody is too small to get real answers. I do not care if you have $200,000 in your portfolio or $2 million. The math of ruin does not discriminate based on account size. The leverage that wiped out 700,000 Korean investors does not check your net worth before it takes everything.
The Bottom Line
Volatility is not the problem. Volatility is the test. The problem is portfolios that were built during a bull market with bull market assumptions baked into every single decision. If your portfolio cannot survive a real correction, it was never actually built for you. It was built for the good times. And good times, as we are seeing right now, do not last forever.