Getting Back to Even

 

Last week's wild market ride sparked more than one conversation about not only recent market action, but the markets and returns since this bear market cycle began in 2000. Watching gut-wrenching declines, punctuated by seemingly strong rebounds, only to be followed by more steep declines, prompted me to visit one of my favorite risk management topics: the importance of minimizing losses when investing.

"In order to make money, you must first not lose money" George Soros

No matter your investment style or approach, being mindful of what's referred to as "drawdowns from peak" is very important That's a fancy way of saying losing money relative to how much your portfolio has grown to over time. 

Say your portfolio started at $100,000, grew to $500,000 then subsequently declined to $300,000. Are you up $200,000 or down $200,000? When examined from the perspective of drawdown from peak, you're down $200,000. I prefer this method of determing progress in wealth management.

"You cannot get ahead while you are getting even." Dick Armey

After steep market declines, investors often underestimate what it takes just to get back to even. The following chart illustrates how advances required to get back to even grow geometrically as it relates to losses:

% Loss of Capital

% of Gain Required to Recover

10%

11.11%

20%

25.00%

30%

42.85%

40%

66.66%

50%

100%

60%

150%

70%

233%

80%

400%

90%

900%

100%

broke

 

The periodic deep declines in the S&P 500 since the beginning of this secular bear market, which I believe began in 2000, have challenged investors to stay the course and certainly required iron nerves to give their portfolios the opportunity to get to "even." So how has that worked out?

From January 1, 2000 through today, it's been quite a harrowing ride to be invested in the S&P 500. The statistics below show just how frustrating the experience has been. Choose your method for risk management and stick to your discipline!

Start date

Jan-03-00

Start price

$119.60

End date

Aug-12-11

End price

$118.12

Number prices

2922

Total gain or loss (Start date to End date)

-1.24%

Annualized gain or loss (Start date to End date)

-0.11%

Total dollar value for $1,000 purchase made on Start Date

$987.63

Total gain or loss for all possible returns

9.67%

Number returns

4,267,581

Number profitable returns

2,693,479

Percent profitable returns

63.11%

Number unprofitable returns

1,574,102

Percent unprofitable returns

36.89%