Announcer:
4 Your Money is brought to you by NelsonCorp Wealth Management.
Brandy Auterson-Hurst:
It’s now time for 4 Your Money. We’re joined by John Nelson, financial planner at NelsonCorp Wealth Management. Welcome back, John.
John Nelson:
Thank you for having me, Brandy.
Brandy Auterson-Hurst:
So when the stock market falls, why does getting back to even become harder than people might think?
John Nelson:
Yeah, I think this is a concept that maybe a lot of investors maybe don’t fully appreciate, especially when we’re looking at periods of time like right now when we’re near all time highs. But the chart I brought with me today kind of illustrates this a little bit that, hey, early on with the losses that we have illustrated here in the red, not a major deal, but as we work our way out, the math really starts working against you.
So 10% loss, 11% to get back to where you were, 20%, about 25% gain that would get you back to where you were. But as we work our way out there is when you really see the compounding effect on the downside of a 40% decline, 66 plus percent to get back to where you were. So although these periods of time are not super often, there are plenty of examples, 2008, 2009, or 2000 through 2001, the dot com bubble, I think for investors to understand the risk and what it takes to get back if you experience those type of losses.
Brandy Auterson-Hurst:
Okay. So what should investors take away from this?
John Nelson:
Yeah, I think just having kind of a disciplined approach and understanding these dynamics before you enter a period of time of turmoil or we see a bear market. Those periods of time are definitely in the future for us, hopefully a long ways out. But understanding the risk reward dynamic and how can you have those losses be smaller losses versus those 30 and 40% declines that take an awful long time to get back.
Brandy Auterson-Hurst:
All right, John, as always, thanks for joining us today.
John Nelson:
Thank you, Brandy.
Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.
Indices mentioned are unmanaged and cannot be invested into directly.
This video includes a paid appearance.