What Does it Take to Recoup Stock Market Losses?
Most investors believe that when they lose 10% of their stock portfolio, they need their stocks to go up by 10% to break even.
Sadly, that’s not quite how things work. It’s a matter of doing the math correctly.
After a stock market correction, your gains need to be greater than your losses for you to get back to even.
Let’s do the math.
- Say your investment is worth $100.
- If it goes down 10%, it will be worth $90, right?
- The 10% loss is based on the $100 value.
- After the 10% drop, the new starting point is not $100, but $90.
- It does take a $10 gain to get back from $90 to $100, but the $10 needs to be divided by $90, not $100.
- The correct math is not 10/100 (i.e. 10%), but 10/90 (i.e. 11.1%)
- So in this case, it would take an 11.1% gain to get back to even.
Did you follow the math and the reasoning? It is critically important to understand it.
Here is the key point: when calculating return percentages, you need to calculate from the starting value as the base ($90 in our example).
Now let’s take this a bit further.
Let’s say your loss is greater than 10%. The same calculation shows that the more you lose, the greater the increase required to break even.
Again, a loss of 10% requires an 11% gain to recover.
A loss of 20% requires a 25% gain to recover (20/80).
A loss of 25% requires a 33% gain to recover (25/75).
A loss of 30% requires a 43% gain to recover (30/70).
A loss of 50% requires a 100% gain to recover (50/50)!
A loss of 75% requires a 300% gain to recover (75/25)!!
A loss of 80% requires a 400% gain to recover (80/20)!!!
A loss of 90% requires a 900% gain to recover (90/10)!!!!
As you can see, the gains required grow exponentially.
The other issue with recovering from losses is the time it takes to climb back up.
It’s like mountain climbing. It’s much faster to go down, than to go up.
So what’s the moral of the story?
Losses are a big deal. Volatility is a big deal. Don’t let financial advisors and portfolio managers tell you otherwise.
This is the reason why building a portfolio that is stable, consistent, low-risk, almost boring, is so important.
And the closer you are to retirement, the more important this concept becomes.
Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit
Are you ready to conquer your financial future? Be sure to join us in September for the VFS Virtual Conference. At the conclusion of the event, not only will you have a better understanding of your financial future, you will also have created your financial plan, and become part of a Community of like-minded Veterinarians supporting one another throughout the year.