Congrats to MVP Joe Flacco and the Baltimore Ravens for becoming Super Bowl champions. Some may be surprised of the outcome or surprised to hear Raven icon, Ray Lewis quoting the Bible in his post game interview. I’m not surprised of either, after all, I made the call and predicted the winner . . . . again. Well, I sort of made that prediction.
How to pick a Super Bowl winner
[pullquote style=”left” quote=”dark”]When asked, “who is going to win the Super Bowl?”, just reply, “the team with the least turnovers!”.[/pullquote] Picking the winner of the Super Bowl is simple, easy, and practically fool proof. When asked, “who is going to win the Super Bowl?”, just reply, “the team with the least turnovers!”. With that answer, one would now have a record of 35-3-9. That’s right. The team that had more turnovers only won the Super Bowl three times. Just 3 times. Amazing, right?
It goes to reason that the team who makes these mistakes find it costly to overcome. It’s hard to make up the loss, especially against another team that is worthy of the Vince Lombardi trophy. Both a fumble and an interception by Colin Kaepernick happened in the 2nd quarter, a quarter I’m sure the 49ers would love to play over again. Fumbles and interceptions kill the chances of a victory and make it extremely difficult to win a championship.
The Arithmetic of Loss
The same is true with investing. We all want to win and make money with our investments, however a period of negative returns can be as costly as those fumbles and interceptions.
Take for example an investment of $100,000. During a bad period, the investment goes down 50%. That drops the value to just $50,000. What does the $50,000 have to earn to get the value back to $100,000? You got it . . . Yep . . . . That $50,000 must earn 100% to get back to $100,000. So an investment that goes down 50% must go up 100% to get back to even. This is referred to as “the arithmetic of loss”. Now you may not have an investment that is risky enough to lose 50%, but maybe you have one that could experience a drop off 10% or 20%. Even a 20% drop would need a gain of 25% to get back to even.
Eliminate your turnovers
As Super Bowl champions protect the football and strive to eliminate turnovers, your portfolios should strive to protect against losses. The stock market is hitting highs, and the Dow is over 14,000. Protect those gains! In recent years, the bond market has produced both interest and growth at uncharacteristic rates. Protect those gains! Don’t fumble!
How do you protect the gains and avoid those “investing inceptions”? Read next week’s blog from Kabler/Thomas Financial Group
Learn more about our Financial Advisors in Johnstown at the Kabler/Thomas Financial Group.