The Math Behind Comebacks

Investing can be a wild ride. Endless ups and downs. Bulls and bears. Both thrilling and crushing. As investors, we tend to focus on the crushing part.

And there's nothing more crushing than permanent loss, the inability to get back what we once had. The math makes recovering from investment loss much more difficult than most think.

A common misconception is that a 10% loss can be recovered with a 10% gain. This is not the case. Let's demonstrate with an example.

Sarah's Comeback

Sarah is a big fan of XYZ company. They have an earnings call coming up and Sarah thinks the company's going to announce a big pop in sales. To participate in the prosperity, she buys $100 in shares.

The call happens and it turns out XYZ had a bad quarter. Sales were lower than expected and the stock takes a hit, dropping 10%. Sarah's shares are now worth $90.

Some time passes and XYZ's sales are starting to catch up to expectations. Investors begin buying and XYZ gains 10%.

Sarah should be back to even, right? Nope.

A 10% gain means her shares are now worth $99 ($90 x 1.10). She's still in the red. Sarah will actually need a 11% gain to get back to $100.

Tougher and Tougher

When you experience a loss, your starting line is pushed back. This means the percentage gain needed to recover will be much higher.

The greater the loss, the greater the gain needed. This is the asymmetric nature of gains and losses. It's a tough road back.

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