Tuesday, August 09, 2011

Recovering From Large Investment Losses

By Rajiv Hargunani

If the old adage “Time is Money” is true, then investors have lost a lot over the last 11 years. At the depth of the recent meltdown (2008-2009), the S&P 500 was down in excess of 50% from its high set in 2007.

Even with the tremendous run-up since Mar 2009 of nearly 100%, the markets (as measured by the S&P 500) are still down about 14% from its all time high set in 2007. Key takeaway from this is to try to avoid large losses in our investments.

Gains and losses are two of the most commonly talked about aspects of investing. Small losses require a relatively small gain to get to breakeven. Larger losses on the other hand require a huge gain just to get to breakeven. To put that in some context, look at the table below which illustrates the gains needed to get back to break-even.

Starting Portfolio Balance	Percentage Loss	Portfolio Value after Loss	Percentage Gain needed to breakeven
$100	-5%	$95	5.3%
$100	-10%	$90	11.1%
$100	-15%	$85	17.6%
$100	-20%	$80	25%
$100	-25%	$75	33.3%
$100	-30%	$70	42.9%
$100	-35%	$65	53.8%
$100	-40%	$60	66.7%
$100	-45%	$55	81.8%
$100	-50%	$50	100%
$100	-60%	$40	150%
$100	-70%	$30	233.3%
$100	-80%	$20	400%
$100	-90%	$10	900%

The table highlights the importance of understanding your risk tolerance and investing accordingly. Given that we have had two huge bear markets over the past 11 years, with indices being down in excess of 40% each time, it is wise to invest according to your risk tolerance, objectives, income, cash flow and liabilities amongst other things. From a financial planning perspective, each one of us has a fixed time period to accumulate wealth in the hope of achieving our financial objective, be it saving for college or for retirement. The time to recover from huge losses could end up derailing those objectives.

The S&P 500 is an unmanaged index of 500 widely held stocks. Inclusion of this index is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index. Individual investor's results will vary. Past performance does not guarantee future results.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material and is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and investors may incur a profit or a loss. There is no assurance any strategy will be successful. Any opinions are those of Rajiv Hargunani and not necessary those of RJFS or Raymond James.

Other articles by Rajiv Hargunani:

Rajiv Hargunani
This material was prepared by Rajiv Hargunani, Financial Advisor of Raymond James Financial Services, Inc., Member FINRA/SIPC
Ash Place 2100 16th Ave S, Suite 1, Birmingham, AL 35205
Telephone: (205)939-0100

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