Page 65 - Ready Set Retire

Ready. Set. Retire!

It’s also a model where losses can outstrip gains, even when
the losses are smaller than the initial gains…what?

Okay, you’ve seen the math. Now let’s do the money.

With fund A, we gained 60% in year one. That works out to:

$10,000 x 1.6 = $16,000

The next year it the fund went down 40%. So, the losses were:

$16,000 x (1-.4) = $16,000 x .6 = $9,600

Even though the loss is only two-thirds of the previous gains,
it’s on 60% more money! That means.4 x 16,000 is actually
more than .6 x 10,000. That’s why the losses hurt more than
the gains help.

Okay, but what about the other way? What if we have the 40%
loss before the gains? What would that work out to?

$10,000 x .6 = $6,000 x 1.6 = $9,600

Here the gain is still on a smaller number ($6,000) than the loss
($10,000). There’s no getting around it. When you have broad
swings in the market, losses hurt much more than gains help.

When I think of a rate of return, I think of an amount you earn
that is added to your money, becomes part of the principal, and
then that plus your original principal earns a rate of return,

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