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Simple comparison of investment loss to break-even return rate

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Comparing previous period investment losses with current period required return to break even.

Published in: Economy & Finance
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Simple comparison of investment loss to break-even return rate

  1. 1. COMPARING PREVIOUS PERIOD INVESTMENT LOSS WITH CURRENT PERIOD RETURN REQUIRED TO BREAK EVEN A FINANCIAL ADVISOR DISCUSSED THE MELTDOWN OF 2008 WHILE GIVING A PRESENTATION TO OUR MBA CLASS. HE STRESSED HOW A 50% PORTFOLIO LOSS REQUIRED A 100% GAIN TO BREAK EVEN IN ONE YEAR. I WONDERED ABOUT THE DETAILS FOR LOSSES BETWEEN 0% AND 25% AND FOR LOSSES GREATER THAN 50%. By: Dave Stinnett (not a financial professional) I am interested in financial topics and could be described as too detail-oriented. Always seek financial advice from a certified financial professional!
  2. 2. 0% 5% 10% 15% 20% 25% 30% 35% 0% 5% 10% 15% 20% 25% REQUIREDGAINTHISPERIODTOBREAKEVEN LOSS PERCENTAGE FROM PREVIOUS PERIOD Previous period loss vs current period gain required to break even 0-25% COMPARING PREVIOUS PERIOD INVESTMENT LOSS WITH CURRENT PERIOD RETURN REQUIRED TO BREAK EVEN FROM 0-25% LOSS Does this line look straight?
  3. 3. 0% 20% 40% 60% 80% 100% 120% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% REQUIREDGAINTHISPERIODTOBREAKEVEN LOSS PERCENTAGE FROM PREVIOUS PERIOD Previous period loss vs current period gain required to break even 0-50% COMPARING PREVIOUS PERIOD INVESTMENT LOSS WITH CURRENT PERIOD RETURN REQUIRED TO BREAK EVEN FROM 0-50% LOSS As the loss rate increases, the break-even required return increases at a faster rate. Low interest rates might motivate investors toward a riskier portfolio for a chance to catch up since risk and reward are “two sides of the same coin”.
  4. 4. 0% 100% 200% 300% 400% 500% 600% 700% 800% 900% 1000% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% REQUIREDGAINTHISPERIODTOBREAKEVEN LOSS PERCENTAGE FROM PREVIOUS PERIOD Previous period loss vs current period gain required to break even 0-90% COMPARING PREVIOUS PERIOD INVESTMENT LOSS WITH CURRENT PERIOD RETURN REQUIRED TO BREAK EVEN FROM 0-90% LOSS High losses require many years of gains to break even (if ever). Who experiences such high losses? Think addicts, gamblers and regular investors desperate to recover from previous losses. After a significant loss, might it be best to consider high-quality bonds and government guaranteed investments? Time and compound interest always work while risky investments often fail.

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