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CHART OF THE DAY: ONE THIRD OF GAINS NOW GONE

10 February 2010 by Cullen Roche 0 Comments

Today’s chart of the the comes to us courtesy of Bespoke Investments. In short order, we’ve seen nearly 35% of the gains in the S&P 500 disappear since the beginning of 2009.  Granted, the 7% loss from the top might not seem like much, but it highlights a much more significant point which we try to focus on here at TPC – risk management!

The math of the stock market is not friendly.  While most investors are intent on reaping the greatest rewards markets are often a game of avoiding the biggest losses.  A 50% loss requires a 100% gain just to break even.  With the S&P 500 still 30% below its all-time highs investors require a 40% move higher just to get back to the highs.  It’s an unfriendly and difficult concept to accept for most investors, but the truth is, your aggressive quest for 30% average annual gains is more than likely reducing your alpha as opposed to adding to it.

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