Let&#x27;s say I take my entire net worth, $500k in cash, and buy a house straight up for $500k, thinking it will be worth $600k a year from now.<p>If someone were to come along and audit me right now, we would see -$500k in cash, and +500k in assets (my new house).<p>A week after I buy my house, the housing market crashes. Now, the highest anyone is willing to pay for my house is $250k. If an auditor were to come along and examine my personal wealth balance sheet, they would see that I reported assets of $500k a week ago, but that my house is only worth $250k now.<p>Now I have to &quot;write that purchase down&quot; by $250k on my personal balance sheet so that it matches its true value on the market. I lost half my paper net worth in a week due to a poor investment decision. (Individuals are generally not required to do this type of accounting, but public firms are so that investors can make informed decisions about which companies to fund.)<p>If you make risky bets, you&#x27;re usually going to have to &quot;write down&quot; or &quot;write off&quot; (take a 100% loss) what you were once counting as valuable assets. Some write offs are inevitable, but if you let them get out of hand its definitely a sign of shoddy investing methodology and poor risk management.