The Real Cost of Loss

Have your investments lost money lately?
What is the real cost of that loss? For many it could be years of their life, for others it will mean a significant impact on their ability to have a comfortable retirement.

According to a Wall Street Journal article dated May 18, 2001 there was a 70.1% loss on the average tech fund in the almost 13 months between March 10, 2000 and April 4, 2001. To get back the value lost in that short period of time you would have to earn 234% (not 70.1%). Base on simple interest, if the market averaged 10% it would take 23.4 years for your account to grow back its original value. For a person age 60, 70, or 80 that is a lifetime.

What if you just lost 50% as a result of market risk?
This chart compares the difference of a $10,000 account that lost 50% and dropped to $5,000 then grew at a compounded rate at 10% (an average stock market based investment) versus a safe money account that has a principle guaranty and grew at an average rate of 5%.

Year 5% 10%
1 10,000 5,000
2 10,500 5,500
3 11,025 6,050
4 11,576 6,655
5 12,155 7,320
6 12,763 8,053
7 13,401 8,858
8 14,071 9,744
9 14,775 10,718
10 15,513 11,790

At the end of 10 years the safe money account (which never lost its value) is up by $3,723 or some 31.5%. This brief study helps to illustrate the significant benefit of not losing your money. Like Will Rogers said, "I am more concerned about the return of my money than the return on my money.

As you approach and reach retirement this becomes more and more important!