Wednesday, February 27, 2013

Importance of Princpal Preservation

In a recent seminar, I was reminded of the importance of protecting our principal against losses. The table below show the amount of gain needed to recover a loss.

Importance of Principal Preservation
Gain to Break Even

So a 10% loss only requires an 11% gain to break even, which is doable.  However, as losses grow, the gain needed to break even grow even faster.  For example a 30% loss requires a 43% gain to recover the loss.   When there is a 50% loss, a 100% gain is needed, which is extremely difficult to do.

That's why it's important to minimize losses.  Big declines require prohibitively large gains to recover what was lost.

For more on The Practice of Personal Finance, check back every Wednesday  for a new segment.

This is not financial advice. Please consult a professional advisor.

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