Monday, October 13, 2008

Loss of capital

Here's something interesting that a lot of people don't often think about or realize ...

If the market drops a total of 50%, and you avoided the first 25% drop, and then invested, how much of your invested capital would you lose?

Answer in comments ...


The Confused Capitalist


Jay Walker said...

You would lose 33.33% of your capital.

Here's how that works ...

$100 investment will eventually become $50. Total loss will be $50.

$100-25% = $75

$75 would represent your entry point.

Remaining loss is to be $25.

$25/$75 = 33.33%.

Jay Walker said...

And here's one more thing; to get back to your original $75 price investment, you need to get a 50% return to do so.

i.e. $25/50 = 50%

Anonymous said...

If you managed to miss the first 25% drop would you not have all of your $100 dollars to invest then only losing the last 25% to end up with 75 dollars?

Neil said...

33% is still right.

If you invest $100 in an asset that is worth $0.750, you'll get 133 shares (and actually only spend $99.75). When that asset is worth $0.500, your shares will be worth $66.50.

You would lose $25 if the stock dropped 25% from your entry point, which is a different question.

The Arizona Anachronism said...

This is a conventional ratio question, isn't it really? You invested when the stock was at 75% of original value, and then it dropped an additional 25%. No matter how much you invested, you still just lost 1/3 of it.