“Losses are more costly to a fund than gains are beneficial”  –  Brent Osachoff 


I say that a lot, and while I’m not exactly sure if I’m the only person that says it that way, I did do Google searches and came up empty so I’m going to go ahead and claim it as my own  🙂

But what do I mean by it?  Well simply put, trading losses and trading gains of equal magnitude don’t actually effect long term fund value growth in the same way.  It’s the losses that will drag you down further than the gains will push you forward.  Let’s look at a quick chart to illustrate:

Anytime trading losses are taken, it actually requires an exponentially larger percentage gain to get back to where you were at.  As simple as the math in that chart is, I really think it’s something that few investors are actually aware of.  And if they are aware of it, maybe they don’t give it as much weight as they perhaps should.

Our Total Portfolio Solution had a drawdown of -4.98% recently.  It’s going to take a subsequent return of 5.25% to get back to break even.  Certainly manageable, and our gain in October will help chip away at that, but the point is it’s very important for long run success to keep drawdowns to a minimum.  Let’s look at some other asset classes and see how far down that chart we can see examples for.


Bonds  –  About as boring as it gets.  Here’s a chart of the Vanguard Total Bond Market Index  (VBMFX)  since 1986:

Obviously pretty consistent, and it doesn’t take much to recover from any of those drawdowns.  However with interest rates near all time lows and some potential issues going forward we’ll see if that holds for long, but at least for the past 30 years it’s been true.


Gold  –  From August 22nd, 2011 to December 15th, 2015 the GLD ETF dropped 45.5%.  I still consider gold to be a good safe haven asset class, but that’s a pretty rough period for gold none the less.  It’s going to take a return of 82% off the lows to get back to where it was in 2011.  We’ll see how long that takes.  Could be years…


Oil  –  It doesn’t get much attention anymore because it has partially recovered, but let’s not forget that from August 28th, 2013 to February 11th, 2016 the price of oil dropped about 75%.  It’s going to take a gain of 300% to get back to where it was.  I’m not holding my breath for that to ever happen…



Stocks  –  Let’s use the Nasdaq index because it’s more interesting.  From March 10th, 2000 to October 7th, 2002 the Nasdaq index dropped 77.8%.  A truly epic crash after the collapse and it took 15 years until mid 2015 to get back to the price we saw in the year 2000.  That’s a 350% subsequent gain to recover.  How many people have 15 years to wait to just break even?

And just FYI, when adjusted for inflation it’s still not recovered from the bust.


XIV  –  Volatility Products like XIV are clearly the new fad this year.  I’ve talked a lot on how I think that’s largely due to the massive rise in risk rather than actual exploitable performance.  XIV Beta is running more than twice it’s long term average which is why it’s outpacing the S&P 500 by so much more than it usually does.  Regardless though, these products can be exciting.  But as we saw in 2011 and the European debt crisis they can suffer huge crashes in very short order.

It took 99 days to suffer a 74.4% drawdown and 349 days and 291% to recover to the same point.  I also believe that during the next recession, which granted sometimes feels will never come, but when it happens I would not be surprised to see the XIV lose 90% or more of it’s value requiring a subsequent 900% return to break even.

Obviously we plan to be in cash or the VXX during most of that, but we still need to be cautious none the less.

Losses are more costly to a fund than gains are beneficial.


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