Today I will put on my teaching cap and do a lesson in Math, one that you may not have seen before. No one likes losses in their portfolio, right? The above graphic illustrates one of the reasons why.
Once a portfolio loses 10% of its value, it takes 11% to make up the loss and break even. With a very large loss, this effect is magnified – a 100% gain is required to erase a 50% loss!
In March of 2000, the NASDAQ composite index peaked at 5,048.62. Over the next 2 ½ years it declined almost 80%, bottoming out at 1221.09 in September 2002. The NASDAQ finally recovered and made up the loss in April 2015, 15 years later! As you can see from the chart, an 80% decline requires a 400% gain to break even.
There are risks and rewards in investing; no risk, no reward. However, it would seem from this graphic that a key element in successful investing is avoiding large losses. And, that is precisely what our investment philosophy and discipline here at Petra Financial Solutions are designed to do.
As my high school geometry teacher, Mrs. Brown, used to say after writing QED at the conclusion of a geometric proof, “Questions, suggestions or criticisms?”
Until next time, Cheers!
* Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results.