205) Add More After Loss

205) Why You Need to Add More Investment After Losses?

This is an interesting question that affect most investors in their investment journey.

Let us assume you had invested earlier and your investment had made 20% loss.
What should you do? Do you invest more or cut loss by selling whatever is left?

First of all, understand what you are investing in. Is it still a good investment or no more hope?
If the fundamentals are still good, then it is still worthwhile to continue with the investment.
If the fundamentals have turned bad and no longer worthwhile to continue, then it is better to cut loss.

Now, let us assume that the fundamentals are still good. It is just that the price had dropped due to certain market conditions.

Let us do the calculations to make a better decision.

Example:  
Ali is 40 years old and plans to retire at 60 years old.

Initial Investment = $1,000.
Initial Unit Price = $0.50
Units Available = 2000.units

1 year later, the investment drops 20%.
Investment loss = 20%

New Unit Price = $0.50 x (1-20%) = $0.40


Scenario 1: Additional Investment
Additional investment = $1000
Unit Price = $0.40
New Additional units = 2500 units
Total units = 2000 + 2500 = 4500 units

Total investment = $1000 + $1000 = $2000.
Once the market recovers, the unit price will go up again.
If unit price become $0.45, the total Value = 4500 units x $0.45 = $2025. Profit = $25.
If unit price become $0.50, the total Value = 4500 units x $0.50 = $2250. Profit = $250.

Ali had made some profits as the unit price goes higher.

Scenario 2: Do nothing
Ali did not do additional investment. His total investment is still $1000 with 2000 units.
If unit price become $0.45, the total Value = 2000 units x $0.45 = $900. Loss = $100.
If unit price become $0.50, the total Value = 2000 units x $0.50 = $2000. Profit = $0.

Let us assume the unit price returns back to $0.50 after another 1 year.
Ali get back his original investment after 2 years.
There is no Profit nor Loss, his total investment still remains at $1000 after 2 years.

Ali had planned to accumulate wealth for his comfortable retirement. Since he had been fearful about the investment volatility, he did not add more investment. He still had the same $1000 after 2 years.

Ali is now 42 years old, 18 years to retirement at 60.
His time to retirement had reduced by 2 years. 
He had to save or invest more now to reach his retirement goal.

Do continuously invest into good investments and always look at the long term. Do not be distracted and be fearful of the short term investment volatility.

Consult your financial consultant on how to plan for your future financial goals.