Your aunt and uncle leave you £20,000 and you decide to invest this.

A year later it’s value has fallen to £10,000 because of a very poor period of returns.

That’s a 50% loss.

Now, what must happen for you to recover the original sum?

It must go back up to £20,000.

The value today is £10,000 and it needs to recover to £20,000. That’s a 100% rise.

A 50% loss needs a 100% recovery  to return to par.

A 25% loss needs a 33.33% recovery and so on.

Does this matter?

Yes, because as many investors have discovered, if you suffer this sort of situation in your portfolio, it can prove troublesome for your long-term goals.

A great example is someone coming up to retirement, who requires their savings/investments to help with income in retirement. The point where you need the money to work for you, the “timing” can be more than influential, it can be crucial. That’s because a loss is really only a loss when you crystalise it (i.e. take something, such as income, from the pot).

Most of the time losses can be absorbed and the natural ups and downs of investment markets mean that things tend to level out and they do “come back” – but there are many cases where this sort of position can cause problems, as you may change objective, not have the time to wait, or simply cannot recover from a disastrous investment experience.

Therefore risk management is more than just looking at the individual investment risk, you have to look at your capacity for loss based on your circumstances and goals as well.