WatchThe stock market is fluctuating every minute of every business day. Each time an individual stock drops 1% it needs a 1.0101% increase to get back to its starting value. Similarly, a 10% drop requires an 11.1111% increase to get to the previous dollar amount. To take this concept further, a 50% decline requires a 100% return to get back to the original starting point. The same concept applies if the stock has an initial increase. If the stock has a 100% increase, it only needs a 50% drop to reach its starting value.
This means that when the market fluctuates, each individual on average must outperform the market just to break even. The larger and more frequent the market fluctuates, the harder it is for each individual’s investment to maintain its original value. It is easy to lose 33.33% of an investment. It is hard to find one that will get a 50% return to break even.
If the stock market fluctuates exactly ten percent down and then ten percent up 50 times over the course of your life, there will be 60.5% of the original investment left. The stock market is best suited for well connected individuals who have inside information to limit the influence of market downturns and take full advantage of the upswings. Why else would politicians spend millions of their own money for a job that pays $300,000 a year?
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A simply old saying:If you lose 50%,you need a gain of 100% to get back to even.
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If you lose, you can cover your losses by pairing, or double down if you must.
You can also claim losses on your taxes without taking them by buying calls. If it's legal might as well do it, everyone else is. If you flatten the gains and losses over years, it's still positive. It's a good investment if you don't gamble.
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EconPete says
Thank you for the math lesson. It's not a market-thing, it's a math/nature/universal-thing. It's easier to destroy than create. Consequently, pick your risk/reward wisely.
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EconPete, Sometimes I think that you are reading an intro economics book, turning to a random page and writing about something you see there. The main point is fair enough, but then you torture logic enough to come with statements like this.
EconPete says
Clearly any idiot that buys a vanguard index fund can tie the market with zero effort. The idiot is not beating the market, yet comes out ahead.
If you take a typical stock or index, print out the graph, and throw two darts at it. You will find that it is much easier to double your money than it is to lose half of it, assuming that your starting time point is the dart on the left and your ending time point is the dart on the right (moving forward in time).
The point of this old saying "If you lose 50%,you need a gain of 100% to get back to even." is to be careful. If you want to make risky investments and deal with the losses, then you should know that a 50/50 chance of losing half of your money needs to be balanced by a 50/50 chance of doubling your money to have an expected return of zero. So, you need to price these risks appropriately. It doesn't mean that the game is rigged against you, and you will lose.