Mad Money Machine

How much gain to get back to even from here?

Suppose your investment is down 33% year to date. What percentage gain do you need on your remaining investment to get back to where you were at the beginning of the year?

A whopping 50%!

How long would it take at an annualized return of 8% to get back to where you were at the beginning of the year? Over 5 long years… sometime in the year 2014. And of course by then the value of the dollar is expected to have decreased due to inflation.

So, suppose an after-inflation return of 3%, then how long to get back to even? Nearly 14 years. We’re talking 2022.

Ah, but I’ve introduced a fallacy in the above scenario. You see, I switched risk on you. If your investment is down 33%, then you were in the highest-risk investments. But an 8% return was historically found in lower-risk investments.  More typical of a high risk investment was 14% or 15% annualized over the long term. (And perhaps especially after a previous bear market?) 

So a 15% annualized gain, minus a 5% inflation, would be net 10%, for a duration of just over 4 years to get back to even.

Someone in the highest-risk investments should have at least a 12 year time horizon before they need to withdraw any of the money or rebalance into lower risk. Take the Risk Capacity Survey at ifa.com to see where you should be invested.