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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.