This month, our chart selection highlights the disproportionate gains necessary to recover from an initial loss on an investment. This chart helps us visualize that as losses in a position increase, the amount of gains required to recover those losses increases even more.
A 5% drawdown only requires a 5% gain to get back to even, while a 30% drawdown requires a much larger increase of 43%.
Even more dramatic is that a loss of 50% requires a bounce-back of 100% just to break even. And a 60% drawdown requires a 150% rebound.
Let’s take Bitcoin as an example. It dropped from its highs of $20 000 in late 2017 to a value of $3 250 less than two years later. That’s a loss of 84% that would require an enormous increase of over 500% just to recover.
That’s why time researching the potential downside of any investment is time very well spent.
The Key Takeaway?
When tempted by the potential return of speculative investment, think twice about the potential for loss.
On behalf of TWM Group, thank you for watching our Chart of the Month. See you next time.
*Source: Placements CI.