Invested Capital vs. Loss Limits: Decide How Much Your Account Can Lose
Separate living expenses and earmarked funds before calling your entire investment balance money you can afford to lose. See how account loss limits differ from trade loss budgets.
Invested capital is the amount committed to the market, while a loss limit is the loss you have decided you can bear while preserving your financial plans. A large investment balance does not mean everyone can afford the same percentage loss. Set separate limits for the overall account and loss budgets for individual trades, and recalculate them as asset prices change.
Distinguish emotional confidence from financial capacity
Saying you would not feel anxious if prices fell is not evidence that you can actually afford the loss. Start by listing expenses that cannot be postponed, such as housing costs, debt repayments, and near-term education costs, then calculate available cash. Check whether your plans would hold if investment losses and falling income occurred together. Conversely, even with ample financial capacity, the risk level you can put into practice may be lower if daily fluctuations are difficult to tolerate.
Allocate open trades within the overall limit
First set the account's allowable loss, then divide the loss budget among individual stocks. Amounts calculated from stock-specific stop-loss levels are planned losses, not guaranteed maximum losses. In particular, stocks linked to the same theme may breach their reference levels simultaneously, so calculate a simultaneous selloff scenario in addition to a simple sum. When the budget is fully committed and a new opportunity arises, first decide whether to reduce existing risk or defer the new trade.
Record any widening of limits after losses
If you raise the original number as you approach the limit, it stops serving as a warning. When a change is necessary, record the date and which changes in income, expenses, or investment goals justify it. Keeping existing trade amounts unchanged after the account's market value falls raises risk relative to current capital. Rather than automatically increasing size to recover losses, reassess decisions using current capital and the remaining budget.
When recording a limit, specify whether it is based on initial capital or the account's recent peak. The same KRW 1 million loss means different things as a loss of principal and as a giveback from a peak. Mixing the two can lead you to treat all prior gains as spare investment capacity or miss rising risk because the account is still above its starting value. The appropriate reference depends on your objective, but calculations and response rules must remain consistent.
Worked example
Hypothetical example: Assume an investment account of KRW 20 million with an account-wide loss review threshold of KRW 1.2 million. Allocating a planned loss of KRW 300,000 each to A and B gives KRW 600,000 in total. If gap-downs cause each trade to lose KRW 600,000, the account reaches its review threshold. That differs from the earlier impression that half the budget remained unused. These figures illustrate the difference between planned and actual losses; they are not a recommendation for an appropriate percentage.
What to check
- Have you separated earmarked funds and emergency savings from invested capital?
- Have you distinguished the overall account budget from individual trade budgets?
- Have you updated risk percentages using current market values?
- Have you recorded the reasons for limit changes, noting whether they occurred before or after losses?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.