Retirement Plan Investing Value of Downside Protection

Few things are simple and universal in the ever-changing financial marketplace of the 21st century. Yet one universal concept is ever present and never changing - not losing money. Although seemingly a straightforward concept, it is often overlooked as investors fail to understand the simple mathematics behind compound returns.

A loss on an investment requires a greater return to get back to where you began. Due to the compounding of returns, the greater the loss, the greater the subsequent return needed to get back to even. To illustrate, if a $100 investment lost 10% of its value, it would fall to $90. To return the portfolio to the original $100, an 11% return is required. With a larger loss, such as half of its value (a –50% return), one would be left with $50. To return to your initial $100 investment, you would need a 100% return, or a doubling of the portfolio to get back to the initial value.

Below is a graph that highlights the subsequent returns required to get each loss back to even: