why cutting losses quickly is good

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Delta news letter has some comedy with insight i love.

“Investors just experienced what it is like to be down 20% and then right back up 20%.  It equals a 4% loss.

This is explained by how percentages work.  Percentage down is calculated from a large number (SPX 2,940.91).  Percentage up is calculated from a smaller base (SPX 2,346.58) which means a smaller absolute rise in the market still equals 20%.  For investors to recover all of the losses from the high, their portfolio would have to appreciate by 25% from the low.

The percentage math gets worse as the loss grows.  For example, if a portfolio starts with $100 and loses $50, it is down 50%.  For the portfolio to return to its original $100 amount, it would have to appreciate by 100%.

Percentage math helps explain why losses are so painful and why avoiding major loss should be a top priority in an investment portfolio.  Delta specializes in risk mitigation to avoid major loss.”

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