Why Mitigating Losses Is Very Important

Mitigating the severity of losses is very important for retail investors. This is because recouping losses is extremely difficult as the percentage of loss becomes higher. For example, to recover or break even from a loss of 50% one would need to make a gain of 100% which is not easy by any means.

From an article by Mathew Young at Richard C Young Ltd:

Mitigating losses is vital for retired investors and those approaching retirement. As the chart below illustrates, when your portfolio falls by 10%, you only need an 11% gain to get back to even. Increase the size of that loss to 25%, and you need a 33% gain to break even—high but doable. Now look at the gain needed to recover from a 50% loss and a 70% loss. To break even from a 50% loss you need a 100% gain, and to break even from a 70% loss—the NASDAQ fell 78% during the dotcom bust—you have to more than triple your money.


Source: Client Letter December 2017- What to Expect from Stocks, Young Investments

Below are a few points to remember:

  • Cutting losses is a critical investment skill. In fact, taking losses us tougher than making gains on an investment since we feel losing money more.
  • Instead of holding a stock with heavy losses and no sign of recovery it is better to take the tax write-off and move on.
  • Always keep track of tax consequences when booking losses.
  • Losing money is part of the investment process and anyone who hates losing any amount of money is better off staying away from equity markets.

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