I’ve blogged about this before in the beginners guide to investing series, but I thought it deserved its own blog topic. Especially considering how bullish the market has been the last couple of weeks, despite all this bad news. Some people new to investing in the last 11 years would have never even experienced a downturn.
Many of us are too heavily invested in shares, but won’t realise it until it’s too late. We will get scared and panic sell. A common reason for this surprise reaction is our inability to perform basic maths.
A common miscalculation is that if stocks go down 30% then that is fine. They only need to go back up 30% and I’ll be back to break even. This isn’t true.
Let’s say you have $100,000 invested. A 30% loss will leave you with $70,000. A 30% gain from $70,000 will only leave you with $91,000. You would instead need about 43% returns to get back to $100,000. Lose 50% and you will need to regain double, 100%.
Investment returns needed to break even from a loss
This is why it is so important when investing to lower our downside risk and protect our gains as best we can to minimise our exposure to losing money. It’s much better to have compounding working for us and our gains, than against us with losses. This becomes more important the larger your balance gets and the closer you get to needing access.
There are also arguments based on comprehensive data that a portfolio of 80% stocks/20% bonds, performs no worse over extended time periods than a portfolio of 100% stocks. You can use this portfolio visualiser to check it out for yourself and play around with different time periods.
What this means then is why would you take on more risk for no more returns?
That’s all for today. Just a PSA to not get too carried away, complacent, or bullish with your investing. If you haven’t rebalanced your portfolio in over a year, chances are you have more stocks than you initially set out for.
I’ve even seen people so confident in the markets recently, that they are keeping their emergency fund in stocks! Terrible idea.
Have a plan. Know why you are investing and for how long. Understand how much drops will impact you and how much risk you are willing to take. And if you have deviated from your plan, get back.
If you need an investment plan or recommendations , then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here