2 Steps Forward, 1 Step back
In 2022, tech stocks lost about -33%, individual stocks such as Tesla, Meta and PayPal had even larger losses in the range of -60%. Global stocks lost around -17% for 2022.
We all know the adage, “high risk, high return”. Suppose you are given the opportunity to an investment that gives you high returns for the initial two years but subsequently experience a loss of the same magnitude in the third year of investment.
It appears that no matter how high your returns are, once losses become too significant, the large returns that you have made in the initial two years are unable to cover for the losses. Take for example, if your investment achieve great returns of 70% for two years in a row and subsequently experiencing a similar magnitude loss of 70% in the third year. It brings your 3-Year Total Return to -13.3%.
We had written on loss recovery mathematics and the same principle applies. In order to grow your capital, it is not only the returns that matter but the management of risk. Based on this simple illustration, a sweet spot of return and loss expectations should lie in the +/- 20% range. Incidentally, this is also the range of returns that we can comfortably expect from global markets in a diversified portfolio.
In the same way that you would not attempt a high risk activity such as sky-diving without professional supervision, investors can benefit greatly by relying on an adviser — having the peace of mind knowing that their plan is in the hands of a professional.
If you have suffered large losses or are worried about possible large losses going forward, click here to schedule a chat with us. (Our 30-minute exploratory meeting is complimentary - either Zoom or In-Person)