What We Should Know About Losses
When they occur, your Wall Street broker likely says…hang in there, your account balance will come back...suggesting you don't have to recognize the loss. The truth is, when the loss occurs the money has left your account forever. When money leaves your account, it moves into someone else’s pockets and will never work for you again. This is often referred to as a lost opportunity cost. What's left in your account will eventually grow & get you back to even, if you don't sell your position. But make no mistake, the loss has provided you a brand new (lower) floor or account value from where you will begin the (often long) process of recovery.
It's kind of like cutting your grass - The grass starts high, it's cut and the clippings are gone forever, the grass begins the growth process all over again, from a much lower height.
Losses are always more devastating than we think.
Why is this important to understand?
Let’s take a look at a simple example - At age 45 Joe suffers a 30 % loss in his 401K account, which reduced his account balance by $40,000. Had Joe never lost the money and averaged 7% growth over the next 45 years, at age 90 Joe’s $40,000 would have grown too $840,098.
The $40,000 loss has compounded to $840,098 during Joe’s lifetime.
Do you think $840,000 would have made a difference to Joe and his family?
Retirement Account Losses are voluntary. You do not have to expose your hard earned savings to risk of loss in order to enjoy competitive gains when they occur.