I just need to get back to even. You hear this saying all the time in the world of casino gambling. If you lose a $10 bet at the black jack table, then you need to bet another $10 to get it back.
But the more bets you lose, the harder it is to get back to even. Some will go so far as to continue doubling their bets in the hope that one will win to get them back to the exact same place they started.
In investing, the more you lose, the harder it is to get that money back through investment gains. In other words, the larger the loss, the more difficult it is to recover. Below is a table that shows the percentage gain needed to get back to even after a loss. As you can see, the greater the loss, the more significant the gain needed to get back to even.
Get out of the Red
| Loss | Gain |
|---|---|
| 1% | 1% |
| 5% | 5.3% |
| 10% | 11% |
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.67% |
| 50% | 100% |
| 60% | 150% |
| 70% | 233.3% |
| 80% | 400% |
| 90% | 900% |
| 95% | 1900% – Almost Gone Forever |
| 100% | GONE FOREVER |
As the chart shows, small losses of 5%, 10%, and even 20% are relatively easy to recover from. But once you cross over 30% losses, the chances of recovering back to even starts to fade, especially with individual stocks.
It took me a while to learn these rules. Don’t lose money and don’t double down on loser stocks. That is a recipe to lose all your money. You can double down on broad based index funds but not on stocks. It’s a shocking statistic that over 75% of individual investors lose money in the stock market. Some say that number is over 90%!
“The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget rule one.” ~Warren Buffet
If you have been in the red for a long time or lost money in the stock market, it’s time to get in the green. You can learn a lot of crucial lessons from making mistakes. And learning from mistakes will eventually make you successful, if you are paying attention and reflecting.
If you’re smart and patient enough to be in the green, then congratulations! Now, you need to stay in the green. When your portfolio starts to grow, corrections and bear markets can quickly set you back to even. But over time, as your portfolio grows and compounds, the size of each loss won’t have as much impact. In other words, your principal is protected because the loss required to get your portfolio back to even grows.
Stay in the Green
| Gain | Loss |
|---|---|
| 5% | 4.8% |
| 10% | 9% |
| 20% | 16.7% |
| 25% | 20% |
| 30% | 23% |
| 40% | 29% |
| 50% | 33.3% |
| 60% | 37.5% |
| 70% | 41% |
| 80% | 44.4% |
| 90% | 47% |
| 100% | 50% |
| 125% | 55.5% |
| 150% | 60% |
| 200% | 67% |
| 250% | 71% |
| 300% | 75% |
| 350% | 78% |
| 400% | 80% |
| 450% | 82% |
| 500% | 83% |
When you are in the red, it can be hard to get back in the green, especially if you are impatient. When you invest in broad based index funds, your chances of that ETF losing more than 30% are very low. This would only happen in a market crash. Where as individual stocks have significant losses all the time.
A good investor is playing on the green side of the investment table. And when you are on the green side, investment losses aren’t as bad.
Take Aways
You want to be in the green. This mindset is important. My mindset when I started investing was to get rich quick. That strategy worked out for a little while. Not because I made good investments but because I was lucky. And that luck eventually ran out and put me in the red with sizeable losses.
Getting and staying in the green requires patience and time. Trying to get rich quick will put you in the red and cause you to make irrational and costly decisions.