Investing, a Life Skill: #3, Understand Gains & Losses

“Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.” – Morgan Housel, “The Psychology of Money

It is only natural to think about investing in terms of gains, but in our experience success is rooted in strategies that also seek to lose less. “Winning by losing less” is not a new concept, but visualizing what it takes to recover and understanding the math behind losses is critical to making more thoughtful decisions. Just as compounding gains help build wealth, compounding losses erode wealth (rapidly). If an investment loses –15% of its value, it takes a +17.7% recovery to get back to even. If an investment loses –50% of its value, it takes a +100% recovery, just to get back to even. The opportunity for investment gains come with a cost—the potential for loss. However, while investing cannot avoid risk altogether, thoughtful analysis and risk management may help dampen volatility and provide a smoother ride.

This is not a recommendation to buy a security, and is shown for illustrative purposes only. Past performance is no guarantee of future results. Source: FactSet. Statements are for illustrative purposes only, and are not a guarantee of results. The use of this statement is intended only for educational purposes to demonstrate the potential impact of returns over time.