The terrible market declines of the past year have left investors everywhere licking their wounds and adding up their losses, and preparing for the possibility of more losses to come. Nearly each and every portfolio which holds stocks and shares is down significantly since late 2007, with 40% drops not uncommon. Just about the only comfort is the thought that the market is bound to turn at some point and then we can all start to make up some of the ground we’ve lost.

 

But what exactly will it take to make up these losses?

Many people underestimate the gains which are needed to recover from big investment losses and the extent to which additional losses put you deeper into to the hole. Amid all the current market gloom, it’s worth taking some time to understand what it might take to re cover from the current market turmoil.

 

Climbing out of the hole

Suppose your fund value falls 50% in value. How much does it have to gain before you’re back where you started? Many people immediately say 50%, but that’s wrong. If the fund price starts at £10 and loses 50%, it’s at £5; gaining 50% would only put it back to £7.50. To get back to £10, the fund would have to rise 100%, twice as much as it lost in percentage terms.

 

Easing the pain

All this may seem depressing, and it is, but it highlights the importance of diversification. If you had your entire life savings invested in one of the funds that have completely imploded, your portfolio would be critically damaged and would be facing a long recovery. But, of course very few investors have all their money tied up in a single stock, with good reason. As I’ve pointed out many times before, diversifying your holdings helps stabilise your portfolio and lessens the chance of one investment torpedoing returns. Even in a market where everything is down, like last year, moderating your losses can make it much easier to bounce back.

 

While there’s certainly no guarantee that the market will take off any time soon, the potential for sharp upward gains – or perhaps better yet, slow steady gains over a period of several years – makes it possible that long-term investors will not only be able to make up their recent losses but will outpace conservative investments like cash and bonds over time.

 

Guaranteed Products

We are now starting to see more products coming onto the market place which offer some form of guarantee to your capital and/or future income. Retaining what we make in the future is vital to rebuild your funds and the use of these guaranteed products should be seriously considered. If you would like further information please do not hesitate to email me or call me for an informal chat.