That’s very true, but just as my gains are just paper gains, a 40% loss is just a paper loss. I would actually love a 40% loss. I’ve only invested a small fraction of the money that I’m going to invest over my lifetime, so I end up way ahead if the market crashes 40% tomorrow but ultimately winds up at an average return over the long run. That would be sequence of returns risk working out in my favor. So I think for a person just starting out or with less than $100k invested, it’s way to early to think about the kind of mitigating systems you mention.

Now, when it gets close to when I want to start withdrawing money, sequence of returns risk becomes the primary thing that I need to worry about. A 40% loss tomorrow is fine, a 40% loss the day after I start withdrawing pretty much instantly kills my portfolio. That’s why around that time I’ll move to a more diverse asset class allocation. Bonds will end up being the star of that show.

And of course, that’s not the only diversification that I’ve built in to the system. I’m anticipating that the passive income streams that I’m setting up now will be still producing for me during the time I am withdrawing from my portfolio, reducing the amount that I need to draw down.

My home is on pace to be paid off in ten years. This helps me in three ways: first it permanently reduces my cost of living for the time I live here. Second it gives me another store of value that I can’t impulsively spend and can eventually cash in if needed (for instance, to downsize after the kids move out). Third it will give me additional capital to invest each month. I can use this to move into real estate investments that cash flow and thus further diversify my position.

Of course, there’s still plenty of risk in my plan, but there’s risk inherent in money. To have money is to have risk because inflation can silently eat it away.

I think your point is a needed one: people need to be aware that a really bad market downturn could severely damage their portfolio if it happens at the wrong time. That’s true, but I don’t think that beginners should hold back until they’ve figured out the perfect system for mitigating risk. First of all, no such system exists; no one is fully immune to risk. Second, the need to protect against risk is far more relevant later in an investors career when they have a lot saved up, no time to recover, and have to start making withdrawals even if their portfolio is losing value. The best bet if you’re a beginner is to not worry about investing 201 until you’ve mastered investing 101 and are actually living it out.