Introduction: Hi guys, its Giang again from Moolahwise.com and in today’s video we will be explaining the true impacts of losses on your money. First we will be explaining what does market risk has to do with the loss on your money! Then we will be discussing what your investment vehicle has to earn the following years just to break even. After that we will be showing a graph of the real impacts of loss when it comes to your money. 

Ok lets get into it.

The three way your money grows: First before we get into we wanted to remind everyone the three way your money grows. The first way is fixed, the second way is variable, and the third way is indexed. You can watch the three way your money grows video for a better explanation but today we are just going to point to the variable way. This will help explain what I mean by losses. In the variable method when the market you are invested corrects itself or goes negative. This is what we call loss. This is where the graph trend downard.

What is loss and how does it affect the growth of my money?: When I say losses , I mean when your money is invested in say a stock or mutual fund and it correct itself and goes negative as depicted by this cartoon. Why is this important? I will explain why this is important to the growth of your money next.

What is the real impact on your money?: So lets say today you had $100 today and you wanted to invest in the stock market and at the end of year 1 the market returns a -50% what will your investment have to return in year two just to neutralize the negative -50% loss on your investment? On paper it sounds like 50 percent is the answer because if you lost -50% then you will need to just get 50% back and you will be even right? Let see if this is the real answer with some numbers applied. If you had $100 and lost %50 in that year, then you will have $50 at the end of year 1. However if in year 2 your investment was up 50% then you won’t be back at $100 yet because 50% of $50 is $25 so you are only at $75 and not at $100 yet. So you see your investment has to yield a 100% return just to neutralize a %50 percent loss. And we hear about stocks and mutual funds going negative all the time, so let me ask you a question, when was the last time your investment returned a 100%? Now that you know that, your investment has to return a 100% just to be EVEN after losing 50%. So let me share a graph of how much your investment has to return just to neutralize any losses.

Explaining the graph. So as you can see in this graph you will need a 100% gain just to neutralize a 50% loss. We showed the math in the previous slide. So as you can see on the graph that if you loss 10% today you will have to get 11% just to be even. You can also see that you will need a 43% gain just to neutralize a 30% loss.

Conclusion: So what is the moral of the story? The moral of the story is that losses hurt your money more than you think. Another thing I want to point out is that while your money is climbing back to the break even point , that time it spent climbing back to even is wasted since your money isn’t “profitable” yet and it just trying to be back at even. Doesn’t it make sense for you to put your money where your money grows regardless of what the market is doing? Ok that is all I wanted to share in today’s video. I hope you understand the real impact of loss on your money after watching today’s video!

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Thank you for listening and bye for now.