Here’s a funny little mathematical fact that turns out to be not-so-funny. If we lose 5% on a $1,000 investment, we’ve lost $50.
Probably happens more often than we care to admit. After all – we have to break few eggs to make an omelet – right? And what’s the big deal – it’s just 5%?
Turns out – it’s not just 5% – because that $50 we gave up to the market will never be ours again. Oh sure – our $950 could recover to be worth $1,000 or much more. But the original $50 we lost is gone forever.
That’s not just a distinction without a difference. Had that $50 never been lost in the first place, it would grow up to be $800 over 40 years (at 7.2%). And that missing $800 will be 12.6% less than what the remaining $950 would grow up to be over the same period – at the same rate.
Economists call this a lost opportunity cost – and more than some abstract textbook theory, opportunity cost is real, spendable money.
The good news is that if we eliminate the “cost” side – we’re left with the “opportunity” side. In other words, if we do nothing more than eliminate the 5% loss – we’ll end up with 12.6% more money down the road when we need it.
And if eliminating losses from your investing equation seems difficult – if not impossible – I’ve got more good news for you – it’s easy when you know how. We can show you how. Just ask.
