What a terrible misonomer: This article should have been called “The Basic Mathematics of the Stock Market.”
Not understanding the simple percentages of losses and gains is a goodly part of the reason so many investors buy into the myth of Buy & Hold.
“If an investment declines 10%, it takes about an 11% gain to break even (assuming you don’t pump in additional dollars). If the drop is 20%, you need a 25% gain to recover. A fall of one-third requires a rebound of 50%. And if your investment falls by half, “you need a double,” or a 100% return, says Mr. Wiener, the New York-based editor of the Independent Adviser for Vanguard Investors. The recovery percentages grow exponentially because you have so few dollars working for you after a big loss.
Last year, the average diversified U.S.-stock fund was down 37.5%—requiring a 60% advance to break even—and plenty of funds were down 50% or more.”
If you understand how this simple math works, then you are in a better situation to appreciate the importance of capital preservation.
The Cruel Math of Big Losses
WSJ, NOVEMBER 2, 2009