Since the stock market rally, people have been questioning the safety of their investments. According to USA Today, some believe that many stocks will have a stark drop after their record highs, while others think that a gradual fall in stock prices until 2020 is on the table and Warren Buffet thinks that the US stock market is a place where reasonableness prevails.
Rather than asking whether stocks are fairly priced, investors should be focusing on how much they are willing to lose before pulling out. According to David Salem, chief investment officer at Windhorse Capital Management says that figuring how much financial misery you are willing to put yourself through before backing out.
In addition to helping you planning for worst case scenarios, this will also help you realize whether you will be able to realistically follow through on your planned investments. In addition, this keeps you from being lulled into a sense security and ambivalence, because you always know how big a hit you can take.
In short, planning for the worst case scenario will help you evaluate where you are and how much more risk you are willing to expose yourself to.