Financial Opinion and Insights

Trying To Get Back to Even?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

You say your investments are down and you’re wondering what it takes to get back to even?  This little story might interest you.

I’m out on the practice putting green near my office,  getting a little fresh air during lunch and shooting the breeze with a few friends, when one of them says, “I had all of my 401(k) in a small cap stock fund that lost 50% during the downturn.  Since then, it’s up 75%!  I should be ahead, but my statement says I’m still down almost 10%!  What gives?”

A lot of people are probably in a similar boat.  Unfortunately, the math doesn’t work that way.  Example:  A $1,000 investment experiences a 50% loss and is now valued at $500.  What does it take to get back to $1,000?  You guessed it:  A 100% gain…. 75% won’t do it.

The table below demonstrates why we, and so many other professionals, focus so much on volatility, not just absolute returnsl.

Down and back to even

-10%  11%

-20%  25%

-30%  43%

-40%  67%

-50%  100%

-60%  150%

-70%  233%

-80%  400%

-90%  900%

Limiting the ‘downside’ just might be worth giving up a little on the upside.  Know someone who’s always `chasing return’ by jumping on ‘hot tips’?  This may be worth their knowing.

Written by Jim Lorenzen, CFP®, AIF®

July 27, 2010 at 8:00 am