As Christmas approaches is there anything better than an ice-cold oyster and a sip of Prosecco?
For me, it’s the combo that reminds me of Summer while Newport is frozen. It’s the counterbalance that makes it fun and it’s the Prosecco that keeps more money in my pocket for compounding. Understanding both concepts, counterbalance and compounding, are key for us all as I explain here:
Yesterday’s trashing in the stock market offers us a chance to review the arithmetic of losses and the value in a counterbalanced strategy.
Technology shares as represented by the Nasdaq composite index lost 3.8% on the day.
Let’s say, for example you began the day with $10,000 in Nasdaq. By late afternoon, when the market closed, it was worth $9,620 or down 3.8%. You now need (not a good word in investing) a gain of 4% to get back to even.
Now, imagine a string of ten days like yesterday, or a 38% decline. A 61% gain is needed just to get back to even, or where you began with $10,000.
Think it can’t happen? So far this century Nasdaq has had annual declines of 38% or more t-w-i-c-e.
Now, imagine you also began the day with $10,000 in GNMA bonds. Let’s use Vanguard GNMA as an example which gained 0.2% making your position worth $10,020.
This century, in the two years Nasdaq declined by at least 38%, Vanguard GNMA made at least 7 percent per year.
OK, so perhaps a balanced approach makes sense in putting the arithmetic of losses in your favor.
Let’s combine the two $10,000 positions, one in Nasdaq and the other in Vanguard GNMA and see how they complement each other.
Your holdings began the day at $20,000 and ended the day at $19,640 or a 1.8 percent loss meaning a 1.8 percent gain is needed to get back to $20,000. Imagine a string of ten days like yesterday or an 18% decline. A more manageable gain of 22% is needed to get back to even or about a third of the work if everything was in Nasdaq.
Understand the arithmetic of losses with the wisdom of a counterbalanced attack and you’ll look at days like yesterday as just another day in the market.
Arithmetic of Portfolio Losses Counterbalanced Total Returns
