June 2020 Client Letter: Investment Math
Investment math can be complex. If a stock dropped 10% this quarter and gained 10% the next, you might think you have recovered the loss. Unfortunately, you are still down 1%. To recover the loss, the stock has to increase 11%.
The bigger the decrease, the more it takes to recover. A 20% loss means you need to earn 25% to break even. If you lose 35%, you’ll need to make 54% to erase the red ink. A 57% drop like we saw during the great recession requires a whopping 132% increase to completely recover.
Investment math isn’t addition and subtraction. It’s multiplication.
The 2020 Bear Market
From February 19 to March 23, the stock market dropped 34%. In the 99 days that followed, it gained over 38.6%! It didn’t erase all the losses, but it was a strong start.
In mid-June, Fidelity made a shocking announcement. Earlier this year, one-third of all their account holders, age 65 and older, sold all their stock positions. Nearly one out of every six account holders—regardless of age—sold all their stock positions.
It is possible a few sold before the market crashed. But remember, we went from an all-time high to 34% lower in 33 days. More than likely, most of those sales happened after the damage began.
Sitting on the sidelines means the investors who sold missed the incredible gains. They wanted to limit further damage, but doing so limited their ability to recover. Remember the investment math. If your account drops 20%, you need to earn 25% to break even. Those who sold their stocks will have trouble doing that in a money market fund or CD.
Bear markets are extremely unpleasant. But when they happen, one of the worst things you can do is move to the sidelines. Bottoms happen without notice. Often times the first few months after produce incredible gains. Missing those gains makes recovering the losses difficult at best.
Uncertainty remains a common theme. The coronavirus is still a part of the story, and it looks like it will be for the foreseeable future. An ugly and intense election season will start soon. Being a patient and disciplined investor is an ongoing challenge.
Over the long term, we remain optimistic. We believe the great businesses will continue to not just survive, but thrive. But in the short term, anything is possible. The next several months could be a very bumpy ride.
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About the Author
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors. He specializes in helping hard working, middle class families plan for retirement.