The S&P 500 reached an all-time high on February 19. Since that time, we have seen one of the fastest declines in value followed by a rapid recovery. The S&P 500 (on a daily closing basis) was down 33.9% from February 19 to the low on March 23. Then, from March 23 to April 30, the S&P 500 gained 30.2%. If investment math were simple, we would add the loss and gain to determine our net gain or loss. Adding the 33.9% loss and the 30.2% gain would give us a net loss of 3.7%. However, the true S&P 500 return from the February 19 peak to April 30 was a loss of 14%. How can that possible?
The truth is investment losses (on a % basis) are much worse for your portfolio than investment gains are beneficial. Let’s take a simple example. Suppose your portfolio was worth $10,000 and then declined 50% to $5,000. If the portfolio then rose 50%, it would only be worth $7,500. Hence, 50% down followed by 50% up results in a net loss of 25% in the portfolio. In order for the portfolio to get back to even, it would have to gain 100% from the reduced value of $5,000.
Even though the S&P 500 had rebounded 30.2% by the end of April, it was still 14% from its all-time high. To get back to the all-time high would require a total gain of 51.3% from the March 23 low.
Given that losses are much worse for your portfolio than gains are positive, one goal for investors should be to limit losses in their portfolio. A 10% portfolio loss requires a subsequent gain of 11% to breakeven. A 30% portfolio loss requires a 43% gain to breakeven. A 50% portfolio loss requires a 100% gain to breakeven. Obviously, it is much easier to reach breakeven after a 10% loss than a 50% loss.
If you are uncertain about your investments, a financial advisor can help you with the many factors and decisions involved with investing. Feel free to contact us with any questions at info@L2Wealth.com.
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