On average, market sectors go through 5-year cycles. Three out of five years are growth, one is flat and the other is negative. Now, let us say that you have gone through a 3-year average growth of 15% per year and you are extremely pleased. There is no doubt in your mind that you should simply hold on to a vehicle that is growing so well. Now, that fund hits its declining period in the 4th year and returns a -15%. You say, “No problem, I will just wait it out and it will be on track again next year.” The following year it gains 15% again, and you smile in your wisdom. However, let’s take a closer look.  As you can see, even though you think your returns are high on average, you are barely outperforming guaranteed instruments and you have 100% market risk!  

Here is the scariest part that you never even ponder. How long do you think it will it take to get back to a 15% average compounded return? You would have to average 55.65% in the sixth year, 27.21% per year for the next 3 years, or 22.17% per year for the next 5 years, just to get back to a 15% average! Is this what you bargained for? You can clearly see how avoiding losses is just as important as making gains. This example clearly illustrates what losses can do to your portfolio. It also introduces you to volatility.  

If your goal is 15% per year, what would it take to recover from one negative year and get back on track?  

ANSWER: You would need a 56% gain in year 5 to 
recover from that one negative year! This is why now,
more than ever, preservation of capital and proven 
active management is critical to you and your 
financial plans.

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