Recovering from a Decline
Chart of the Week for March 11 - March 17, 2011
When developing an investment strategy, it is important to consider the risk of a decline in a portfolio's value as well as the probability of an increase in its value. Perhaps, it is even more important.
The above graph illustrates the asymmetric relationship between various levels of investment gains and losses. For example, if a portfolio starts with a $100 value and it declines by 10% to $90, it requires an 11% increase to get back to its original $100 value. The disparity gets more pronounced as the magnitude of the decline rises. From the stock market high in October 2007 to its low in March 2009, the stock market, as represented by the S&P 500 Index, dropped 57%. To get back to its original value, it must rise 132%.
All investments involve some degree of risk and investors should focus on the possibility of loss as well as the possibility of gains. As illustrated, the percentage gains required to offset losses are greater than the percentage losses involved. Care should be taken before risky investments are added to a portfolio to ensure they are consistent with one's personal goals, risk tolerance, and time horizon.
© Copyright 2011 ICMA Retirement Corporation, All Rights Reserved
Posts
