One of the most eye-opening aspects of investing is the impact of market declines on your total return. If you make 15% in year 1, another 15% in year 2, another 15% in year 3, and then you lose 15% in year 4, you earn….6% annual return. That one year of 15% loss cuts your four year annualized return to just 6%.
Another observation:
If the market drops 10%, it has to rise 11% to get back to your starting point.
If the market drops 20%, it has to rise 25% to get back to your starting point.
If the market drops 33%, it has to rise 50% to get back to your starting point.
If the market drops 50%, it has to rise 100% to get back to your starting point.
All to the point that managing downside risk is very important. We are trying to by hyper-alert to market signals to manage that risk as best as we can.