Why it’s harder to recover an investment loss

Do you have a losing investment? You may have to wait longer than you think to make up for this loss.

The answer lies in simple arithmetic.

Still, “Investors always misunderstand that,” said Ted Jenkin, a board-certified financial planner based in Atlanta and a member of CNBC’s Financial Advisor Council.

Here’s an example: Let’s say you invest $10 in a stock. Its value drops to $8 – a 20% loss. The value of the share then increases by 20%.

One might assume that you’ve broken even – but that’s not the case. That 20 percent jump takes the stock to $9.60 instead of the original $10.

To fully recoup the initial $2 loss would require a 25% increase.

This calculation explains “why it’s so difficult to regain what you’ve lost because you always need to get a better return than the actual return you lost,” said Jenkin, founder and CEO of oXYGen Financial.

Here is a real-world example.

The S&P 500 The stock index crashed in the early days of the Covid-19 pandemic. The index fell from its close of 3,386.15 on February 19, 2020 to 2,237.40 on March 23, 2020 – a loss of 34%.

The index had regained its value until August 18 of this year, when it closed at 3,389.78 – a 52% rise from the March low.

This is perhaps a sobering math lesson for investors, who tend to feel the pain of financial loss more than gain.

But it also has important implications for certain investors.

For example, retirees can choose to withdraw a certain portion – say 3% or 4% – of their retirement account as income each month. If the value of those accounts goes down — which means income goes down too — it can “take you a lot longer than you think to get back to your normal income level,” Jenkin said.