204) Returns to Cover Lossses

204) How Much Future Returns Required to Recover Past Losses?

You may be wondering how much positive future returns to breakeven your past losses.

Basically, the more loss you had, the bigger returns you have to get.

Using the formula for Total Return, you can calculate the numbers.
Let's say you invested into Funds and made a lost in 2016. How much you need to get positive returns in 2017 for a breakeven?

For breakeven, the total return is ZERO %.

Fund A:
Total Return = 0%
Annual Return 2016: -5%
Annual Return 2017: X?

(1+Total Return A) = (1+AR 2016) x (1+AR 2017)
(1+ 0%) = (1-5%) (1+X)
(    1 ) = (0.95) (1+X)
(1+X) = 1/0.95
(1+X) = 1.0526
X        = 0.0526 = 5.26%

Not Much Difference, right? 

Now, let us calculate if the lost is -20%.

Fund B:
Total Return = 0%
Annual Return 2016: -20%
Annual Return 2017: X?

(1+Total Return B) = (1+AR 2016) x (1+AR 2017)
(1+ 0%) = (1-20%) (1+X)
(    1 ) = (0.80) (1+X)
(1+X) = 1/0.80
(1+X) = 1.2500
X        = 0.2500 = 25.00%

Wow, you need 25% return just to recover the 20% loss.

Now, let us calculate if the lost is -50%.

Fund C:
Total Return = 0%
Annual Return 2016: -50%
Annual Return 2017: X?

(1+Total Return C) = (1+AR 2016) x (1+AR 2017)
(1+ 0%) = (1-50%) (1+X)
(    1 ) = (0.50) (1+X)
(1+X) = 1/0.50
(1+X) = 2.00
X        = 1.00 = 100.0%

Wow, you need 100% return just to recover the 50% loss. 
That is DOUBLE your investment amount for next year.

Now, let us calculate if the lost is -80%.

Fund D:
Total Return = 0%
Annual Return 2016: -80%
Annual Return 2017: X?

(1+Total Return D) = (1+AR 2016) x (1+AR 2017)
(1+ 0%) = (1-80%) (1+X)
(    1 ) = (0.20) (1+X)
(1+X) = 1/0.20
(1+X) = 5.00
X        = 4.00 = 400.0%

Wow, Wow, WOW! You need 400% return just to recover the 80% loss. 
That is 4 times of your remaining capital just to get back your original capital.

Now, let us calculate if the lost is -95%.

Fund E:
Total Return = 0%
Annual Return 2016: -95%
Annual Return 2017: X?

(1+Total Return E) = (1+AR 2016) x (1+AR 2017)
(1+ 0%) = (1-95%) (1+X)
(    1 ) = (0.05) (1+X)
(1+X) = 1/0.05
(1+X) = 20.00
X        = 19.00 = 1900.0%

Wow, Wow, WOW! You need 1900% return just to recover the 95% loss. 
That is 19 times of your remaining capital to get back your original capital.

How long you think you need to invest just to get 19 times of your remaining capital?
Definitely it is going to be a very long time.

By then, most people will never want to invest anymore if they had lost 95% of their money.

Here's the summary for your reference.
Loss 5%, need 5.26% to breakeven.
Loss 20%, need 25% to breakeven.
Loss 50%, need 100% to breakeven.
Loss 80%, need 400% to breakeven.
Loss 95%, need 1900% to breakeven.

Be aware of your investment RISKS and how much you can afford to lose.
Do Diversification and practice Dollar Cost Averaging method on your investments.

Consult your financial consultant on how to diversify your investments.