Investors holding stocks and bonds as part of their portfolio of investments have experienced and will experience challenging market environments as is the case right now. This is an unavoidable aspect of a long-term passive investing approach. But how much you lose when you lose will have a major impact in your ability to compound your money.
Now math is a funny thing when it comes to investing. For example most might think that if you lose 50% of an investment then in order to recover that loss you will need a 50% return to do so. But math doesn't work that way and the more you lose the gains needed to recover to break-even increase exponentially.
Take a look at the graph below...
This shows that if an investor has a portfolio loss of 25% it will require a 34% gain to break-even or an additional 9% beyond the loss but if the loss in the portfolio is 50% then the required gain needed to break-even is now 100% or double the loss.
This means that by reducing risk and losing less during troubling times the investor is able to recover more quickly and his ability to compound his money increases as well and potentially resulting in hundreds of thousands if not millions of dollars in additional portfolio gains over a life time.
This reminds me of the story of the Tortoise and The Hare and if you recall the moral of the story is that slow and steady wins the race. Nothing could be more true when it comes to investing and in maximizing the principle of compounding.
In summary, the message is simple and clear and can be boiled down to one thing "Win More By Losing Less"