The Arithmetic of Loss

When markets swing, the math of recovering from a loss works against you: the bigger the drop, the larger the gain you need just to break even. In this short video, managing partner and CERTIFIED FINANCIAL PLANNER™ Allen Stocker walks through a simple example showing why taking a little less risk — and losing less — can leave you meaningfully better off over time.

Video transcript

Hi, I’m Allen Stocker, managing partner and certified financial planner with Patriot Asset Advisors here in Pataskala, Ohio. The markets have been all over the place so far this year, and the first half has just come to a close. Since the markets haven’t made much progress, I want to chat for a couple of minutes about the arithmetic of loss.

Let’s take two different investors, Investor A and Investor B. Each has half a million dollars in a 401(k) or corporate retirement account. Investor A invests a little more conservatively: up 4% one month, down 2% the next, and that cycle carries on for 36 months. Investor B chooses a more aggressive path: up 8% one month, down 6% the next, and so on for 36 months. Which investor do you think did the best over that period?

Investor A did significantly better. In fact, their 401(k) would have grown by about $48,000 more than Investor B’s — because they took a little less risk and lost less. Look at it this way: if an investor loses 20% in a given year, they have to earn a 25% return the following year just to get back to even. So manage risk — and if you need help in that direction, we’d be happy to offer some advice. Patriot Asset Advisors, patadvisors.com.