These are our guiding principles because of the insidious nature of monetary losses when they occur in an investment portfolio… (e.g., 1% on-going management fees)…
Let’s take an example where a portfolio is valued at $1,000,000 but now “the market” is down 10% for the year. We are left with $900,000, minus the fund management fees of 1% ($9000), bringing the total portfolio value down to $891,000 at the end of the 1st year. Let us now be generous and say that the “market” is back up 10% the following year, bringing our portfolio value back to $980,100. We must then subtract the 1% fund management fee of $9,801 to arrive at a net portfolio value of $970,299 at the end of two years.
But you may be asking yourself, “Wait a minute. If our initial portfolio started with a value of $1,000,000, then had a decrease of 10% and then an increase of 10%, why are we still down $29,701?
What this example shows is that “the market” must increase by much more than it originally declined just to get back to even. Most people do not realize this because they often contribute new capital monthly to their 401k and IRA accounts. But there is never a true accounting of what a portfolio actually gains from “the market” on top of the continued cash investments over time. This is why protection of your principle is key to long term wealth preservation and accumulation.
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