Losing $200 hurts more than gaining $200 feels good. Sarblo and Peter show why: after a 20% drop, you need a 25% gain just to break even. They argue for keeping money in stable assets to avoid chasing returns after losses.
Your wealth must sit somewhere. Storing your wealth into something that's fluctuation, which is fluctuating all the time based on the rates, can produce a different outcome. But if you store your wealth into an instrument which can only go up in value every single day, doesn't matter what happens in stock market, doesn't matter what happens when it comes to pandemics and recessions and depressions going forward, your wealth in that instrument cannot be less than what it is today.
Pain from losses are more enduring than excitement from gains. In one of our videos we talked about how average rates of return don't matter. In this video we're going to expand on how those losses have a bigger impact than gains when it comes to solving our long term objectives. Sarblo, do you have your trusty annotator there as well as Excel?
Yes, I do. Let's dive in, Peter. Let's dive into this, this, this example and this would be a pretty good teaching point. When I saw this the first time, I was blown away. So.
So let's, let's consider, Peter, that you have thousand bucks. I'm just going to set my microphone right here. You have thousand bucks.
Can you see the.
Yes.
Can you see me underneath? Okay, good. So you have thousand dollars and you invest that money into something that's going to produce 20%. Again, this is just a teaching point, guys, just so that you are aware of all of this. So if you got thousand bucks, you invest into something that's going to produce you 20%. And this is year one. So Peter, what would be your new account balance?
It'd be $1,200.
1,200 bucks. So plus 20% will make it 1200 bucks at year one. Now year two is coming. Now let's assume in year two you lose 20%. So if you lose 20%, your account balance at the end of year one is $1,200. But now you lost 20%. Is your account balance back to 1,000?
No, it's below that.
It's below that. What's the account balance?
I have it at 969 60.
It's the same rate, but it's a different outcome. See, when you're gaining momentum in investments, fantastic. But when you start losing money, the losses can be more than the gains. Not year two, you're down to 960. And if you want to go back to $1,200 because that is what your original account balance was, do you have to earn 20% to get back to 1,200 or do you have to earn more than 20% to come back to.
1,200 now, Peter, you definitely have to do more.
And what is that more?
25%.
So now you have to earn 25% to make your $961,200. So when you start losing money, you have to chase a higher rate of return. Now you, you have to risk your money even more to just come back to where you were before originally. And this is what happens out there. And this can be avoided. See, your money needs to sit somewhere. And you must have heard us repeat this so many times on the previous videos. But repetition is going to be your best practice. Your wealth must sit somewhere. Storing your wealth into something that's fluctuating all the time based on the rates can produce a different outcome. But if you store your wealth into an instrument which can only go up in value every single day, doesn't matter what happens in stock market, doesn't matter what happens when it comes to pandemics and recessions and depressions going forward, your wealth in that instrument cannot be less than what it is today. It will produce much more confidence for you in terms of obtaining your objective. And you can sleep easy to check out the attributes of the perfect investment. Make sure that you check this video out.
