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Understanding The Law of Losses

May 10, 2016

Are you familiar with the “Law of Losses?” Understanding how this principle works can be critical to pursuing your long-term investment and retirement goals. The principle is based on the fact that a percentage loss hurts your portfolio more than an equal percentage gain helps it. That’s because a percentage loss can only be erased by a larger percentage gain, regardless of whether the loss or gain occurs first. For example, a loss of 50% in a $100,000 investment leaves you with $50,000. To recoup your loss, a 100% gain is required just to return to your baseline of $100,000.

The simple mathematics of gains and losses is the reason why stock market volatility can be so harmful to your investment portfolio over time, especially if it closely tracks one of the leading stock market indices. On the other hand, an investment strategy emphasizing prudent asset allocation and diversification may help provide a potentially smoother and more comfortable ride over the long term. In a well-allocated portfolio that seeks to manage risk and reduce exposure to volatility, the need to pursue aggressive market returns to make up for significant losses is eliminated. However, the best way to determine the right risk management strategy for you is to consult with a professional wealth advisor.

If you’re seeking ways to help reduce risk exposure in your investment portfolio, contact us at (714) 634-8051 to schedule a consultation.

*Investing involves risk including potential loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. 

*This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

*Asset allocation, which is driven by complex mathematical models, should not be confused with the mush simpler concept of diversification. Both asset allocation and diversification reduce volatility, however, neither guarantee future results