Don't Lose Money
Don't lose money.* It is the most basic of all investment rules ... but it's this obvious, and yet sage advice that has formed and governed our investment decisions and philosophy at Trader Wealth Management. Loss of capital, over any period of time, can have a disproportionate and exponential impact on compounded returns and your overall financial health. The loss of money, while not reflected in reported simple average returns, reduces your compound returns and thus, the money available to you at any given point in time.
Losing Money Effects Compound Returns
We realize that our clients, with their hectic trading schedule and fast-paced work environment, do not need a lot of "investment mumbo jumbo" to crowd their minds. They are intelligent investors who are simply concerned with the bottom line. Compound returns are the most precise and accurate reflection of your portfolio's bottom line and thus, they are of utmost concern for us as your Investment Manager.
Compound returns are a reference to the cumulative impact of gains or losses on your portfolio, they are a reflection of our ability as investment managers and they are indication of how much money is in your account. Simple returns, on the other hand, are the returns that occur each day, month or year and are only a snapshot look at an investment's performance without regard to its history. For example, if a portfolio is up 10% one year and down 10% the next, the simple return on this portfolio is 0% and the manager can report a "break-even" performance over these two years if he refers to his simple returns. However, when it comes to compound returns, which reflect the net effect to your account, the portfolio is actually down 1%. The loss in year one reduced the amount of capital invested for the following year and therefore, a higher performance was needed simply to return the investment to breakeven. It would take an 11% gain to make up for a 10% loss, regardless of the order of the gain/loss.
Below is another illustration of the difference between simple average returns and compound returns, as well as the impact of losses no matter when they occur. Each Manager (A through F) had a different investment approach and therefore, performed differently in each of the three years. The table represents the different returns year-after-year over a three-year period for six separate managers.
In each case, the simple return over the three years is 10%, whereas the compounded return (the amount of gain you have realized) fluctuates between a high of 10% and a dismal 3.49%. Despite the larger returns in some years, the investment is more severely impacted by the loss. Interestingly, as the size of the loss increases, a greater percentage gain is required to restore the account back to breakeven. In short, it is important to understand that managers can brag about simple averages but you can only spend compound returns. Our goal at Trader Wealth Management is to execute investment strategies that capture the most of bull markets while preserving gains in bear markets to provide you with superior long-term compound returns.
*While our rule of thumb for investing is "don't lose money", investments with TWM have the potential for negative returns over both the short and long term. Our goal, however, is to limit the downside through security selection, asset allocation, diversification and the use of active risk management, including the use of options and contra-funds.
Main Office
Trader Wealth Management, LLC
509 W Old Northwest Highway, Suite 240
Barrington, IL 60010
CBOT Office
The Chicago Board of Trade Building
141 West Jackson Boulevard, Suite 1404
Chicago, IL 60604