Warren Buffet has two rules when it comes to investing.
Rule No.1: Don’t lose money
Rule No.2: Don’t forget rule No.1.
As much as he may have said this tongue in cheek, he does have a point. Losing money is no fun from an emotional standpoint and it makes it even harder for your portfolio to recover.
What do I mean?
Let’s say you invested $100 and lost 10% in your first year investing; your account would be down to $90. Not the start you were looking for, but your second year goes much better and you end up making 10%.
Back to even right?
Unfortunately no, because let’s not forget you started the second year with only $90. If you made 10%, that’s only a gain of $9 to bring your portfolio to $99.
To get back to $100, you need to make 11.11%.
The more you lose, the more difficult it is to recover.
As I’m currently writing this, the US stock market is down 30% from it’s high. Had you invested $100 at the top, today you would have $70. To get back to even, your investment would have to grow by nearly 43%. That’s a tall order, but at the same time, it also presents a tremendous opportunity.
If you believe that we’ll eventually get over this pandemic and markets will return to where they were (hint: After bear markets, US stocks have recovered and reached new highs every single time), then it’s a great time to be investing.
If you’re able to invest a brand new $100 starting today, you know that your upside is 43% once the market recovers.
See the chart below to see your average return based on how many years it takes the market to recover.
|Years for Market to Recover||Average Yearly % Return|
Even if it takes the US market a few years to recover, that’s a rate of return that I’d be happy with.
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Check out my latest article: The Stock Market is Down, Time to Buy?