market recovers

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
1 43%
2 21.5%
3 14.33%
4 10.75%
5 8.6%

 

Even if it takes the US market a few years to recover, that’s a rate of return that I’d be happy with.

Have questions about your investment strategy? Feel free to get in touch here or by email at msabourin@harbourfrontwealth.com

Check out my latest article: The Stock Market is Down, Time to Buy?

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Marc Sabourin is a Winnipeg based Financial Advisor and Retirement Specialist with Harbourfront Wealth Management. His specialty is working with pre-retirees and retirees who are looking for retirement, investment, & tax advice. 

Disclaimer: The views expressed are those of Marc Sabourin, Certified Financial Planner, and Investment Advisor and not necessarily those of Harbourfront Wealth Management Inc., member of the Canadian Investor Protection Fund