Quick question: If you lost 50% of your money in a year and gained 50% in the next year, where would you be? Most people would claim even, but that’s not true. If you lose half your money in a year, then you would need to double it just to claw back to even. After suffering a 50% loss, the reality is that no matter how many years it may take to double your nest egg, you would be exactly where you started. For this reason, you cannot take past performance as a signal of the future, and you should consider having a well-defined sell discipline in your strategy to potentially avoid catastrophic losses.
Overall, taking a long-term perspective does help, but gains have to exceed losses significantly to move up a portfolio value. To help you understand performance and the important sequence of returns, here are some figures of the sequential gains required to neutralize losses merely to break even:
Lose 5%? Breakeven gain = 5.3%
Lose 10%? Breakeven gain = 11.1%
Lose 20%? Breakeven gain = 25%
Lose 25%? Breakeven gain = 33.4%
Lose 40%? Breakeven gain = 66.7%
Lose 50%? Breakeven gain = 100%
Lose 75%? Breakeven gain = 300%
Did You Know? Many investors, because they do not always follow how percentage gains and losses work, still have not recovered the losses from the financial crises of the past. Even worse, they may only be receiving excuses from their current advisor instead of potential solutions. If you feel as though you are not gaining the ground you want with your investments, then please feel free to reach out to us for a second opinion.