The Mathematics of Loss

If you start with $1,000,000 and lose $200,000 you’ve lost 20%.  To get back even you need to make back $200,000…the same amount of money, but it requires a bigger percentage gain…25%.  If you lose 50% of your portfolio, you need to gain 100% just to break even.

Let’s allow a picture tell the story better than trying to explain it.  This is a perfect time that a “picture is worth a thousand words.”

mathematics_lost

How much you lose in percentages is in red across the bottom.  How much you need to gain back in percentages just to get even are the numbers in green.  The take-away from this is simple: avoid losses.  It’s just too much work to get back even.  And, then, of course, you have to factor in the time it takes to get even.  Losses seem to come in a short time frame, but gains take longer to achieve.  And since none of you are getting any younger, you simply don’t have the time to make up for mistakes that you used to when you were younger.  The obvious solution goes back to don’t lose the money if the first place….understand the risk involved and do your best to manage it. You can’t eliminate it, but you can manage it.