My last post got me to thinking about the mathematics involved in overcoming negative returns. In that post, I mentioned that 15 of the ETFs listed in the Wall Street Journal are down over 10% so far in 2008 (and that’s after just 3 days of trading!).
If a stock goes down 10%, it takes a return greater than 10% just to get back to the original price. To illustrate that point, take a look at this graphic:
So, if an investment goes down 10%, it takes a return of 11.11% just to get back to the original amount.
Now let’s say at the beginning of the year you were looking for a 10% return on your investment over the next year. But, on January 4th, you already found yourself down 10% on the year. What kind of return would you need to get so that you still received a 10% rate of return over the year? The answer is a whopping 22.22%!
Pretty amazing isn’t it? It will be interesting to see where some of those ETFs finish for the year.