MINT HILL, NC – What does the phrase “rate of return” mean to you? What if I told you fear and greed play a role in our thinking? When we are fearful, we don’t want to lose any money. When we are greedy, we want to make as much money as we can. The desire to make as much money as you can without losing a dime is called loss aversion. Another important factor to remember is that rate of return can often be misleading. Here are two investment examples:
Year 1 down 10%
Year 2 up 10%
0% Average Return: (10%-10%)/2
$100,000 Invested = $99,000
Year 1 up 60%
Year 2 down 40%
10% Average Return: (60%-40%)/2
$100,000 Invested = $96,000
How does an investment with a higher rate of return net less? It all comes down to volatility. It does not take a 30% gain to recover from a 30% loss. It takes almost 43% just to get back to even! By limiting volatility and losses before they become catastrophic, your investments don’t need to earn as much on the upside to outperform over time. Mind-blowing isn’t it?
Slow and steady wins the race. If you don’t feel like your portfolio is setup to limit losses and maximize long-term gains, let’s talk!
Let us help you find your clarity of purpose!
Portions of this article were written by Beacon Capital Management for use by your local Cambridge Investment Research Financial Advisor.
To discuss further, please contact me at (704) 817-4480 Option 2, or by email at email@example.com.