Investing – "Never Lose Your Money"
I’d thought I’d write something here about an investment philosophy which I have mulled about.
It’s very natural to read the statement above in the subject of the post and seem to understand it well. It’s pretty obvious to anyone in trying not to lose any money at all in the first place. duh. Intuitive right? But it’s a lot harder in practice to appreciate it.
The statement applies not only to the stock market but in other types of investment. But it’s easiest to relate too when talking about equities and stuff.
My key emphasis from the above statement is this: Once you lose money, it is harder to make it back.
Why? Because your capital is eroded when you have lost a certain percentage of it. And a smaller capital makes it more difficult to reach a certain target amount. Let me illustrate.
Since August last year, SSE and STI has corrected over 30%. Say you have invested $1,000 in ETFs that follows both index well, your value will be at $700. 30% loss right? And it seems very natural for any investor to console himself saying that “it’s ok”, “The market will recover”.
It will. But it will take longer for it to reach your original level of investment of $1000. Why? Because a 30% drop does not translate to a 30% increase in order to recover back to the same level. A 30% increase will only make your remaining $700 increase back to $910. In fact, you need exactly 42.8571% to reach $1,000 again.
Imagine those people who were stuck in the tech boom in 2001 where some prices fell more than 80%. To recover to the same level, they have to shift their eroded capital to another stock or wait for the same stock to rise more than 400% in order to go back to the same level where they started out.
I have put a picture below (click to enlarge) of a table to show the percentage increase needed to make up for a certain percentage loss.
This is a reason why a cut-loss strategy is crucial for any type of investment. We just have to get in our heads that by letting our investments drop more, we are incurring a larger loss than it actually looks like.
Follow me on Twitter and be the 1st to know what I post here.
For regular updates, Subscribe to me here
Recommended Program for the Month
Other Posts
- Besides Equities….
- Why Invest in Equities (and Why Not)
- Endowment Plans for U?
- Investment – Personal Risk Assessment
- How to Get Started in Investing- the Admin and what nots
- A Very Red Dow
- Investing is Enjoyable and Funny
Very useful post. where can i find more articles no this subject ?