The Built-In Return Advantage Of Avoiding Loss

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The first investing guideline, according to popular belief, is "Don't lose money." 

That guideline is crucial because losses significantly affect compounded returns. 

Simple returns are those that happen once a day or once a month. Compounded returns are the kinds of returns that we can ultimately spend because they reflect the cumulative effect of gains and losses on earlier returns.

Is an investor at breakeven over a two-year span, for instance, if their investment is up 10% one year and down 10% the next? Even though the outcome is 0% if we merely average the two years, the investor's account will actually be down by -1%. (on a cumulative basis). No matter what sequence the gain and loss periods are in, this happens. In reality, a -10% loss requires a gain of +11% to make up for it. 

Additionally, a larger percentage gain is needed to bring the account back to breakeven as the deficit grows. For instance, it requires a +25% gain to make up for a loss of -20% and a +50% gain to make up for a loss of -33%.

Investors in the tech bubble know it will take a recovery of +400% to make up for the -80% drop in the Nasdaq. 

Below reflects 5 ETFs that represent stock, bond, commodity, currency, and volatility indices which employ a simple “dynamic” absolute return strategy that avoids losses.

To learn about the dynamic strategy, go to this link.






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Disclaimer: These illustrations are not a solicitation to buy or sell any ETF. I am not an investment advisor/broker

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