Calculating Investment Loss Recovery: Complete Guide

Investment has it ups and downs, and you may be bullied into loss by falling inflation figures and lessen positive earning reports and you will require more positive value to regain your position.

Investment losses and gains have mathematical asymmetric relationship, you need to recover from losses. So how much do you need to recover from the investment losses?

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In this guide, we will show you how much an asset has to revalue for each percentage point that has depreciated to reach the initial level. In other words, we are going to see what percentage of profits you need to achieve to recover the losses of our investment

How to recover from stock loss

Recovering the losses of an investment is not an easy task. It is important to highlight the importance of having a clear time frame for an investment, as well as the maximum losses you are willing to assume.

% Necessary to recover

In the graph below, we see that the recovery of losses is not linear, which means that if I lose 50%, I need a 100% return to recover the initial level.

That is, when I buy an asset for a price of £20, when it depreciates 50% (by half) its price becomes £10.

From this moment, to return to the initial situation, the asset will have to revalue 100% (double) to go from £10 to £20. If it revalued only 50%, it would go from £10 to £15.

how to recover from stock loss

Rate of Change

Rate of change measures the change in value of a variable like security over a specific period of time in order to access it momentum with respect to it original value. It may be positive or negative.

The positive rate of change signal that the prices are rising, while the negative indicates that prices are falling and a potential loss is imminent.

The formula used is the Rate of Change:

Percentage loss and equivalent percentage recovery

The table shows the percentage loss and equivalent percentage gain to recover the initial loss:

This table indicates that if you lose 1% of your investment, it has to appreciate by 1.01% to return to the initial level, if it loses 20%, it has to appreciate by 25%, if you lose 80%, it has to appreciate by 400%, that is, Multiply by five!

If we lose 80% we have to multiply by 5, since if we buy an asset at £10, and it loses 80%, its price is now £2, and to reach the initial level (£10) it has to multiply by 5, or equivalently appreciate by 400%.

If this table is already painful to see (although also realistic), to all this it must be added, that trends tend to be stable over time.

That is, a stock that is falling, despite the volatility it may have, if there have been no significant changes in the company's activity or how it focuses its strategies, the most logical thing is that it tends to continue falling. Therefore, to carry out a correct risk coverage, it is essential to limit losses from the beginning.

Limiting losses – up to how much?

The fact of limiting losses is important when making an investment in equities. It depends on the time frame, the level of risk that an investor wants to assume, and the losses he is willing to assume. It is a very subjective decision.

From the table above, it is obvious that the recovery ratio between necessary recovery and loss begins to increase, since as we have said, the relationship is not linear.

In this table, we can see the ratio between the percentage of necessary recovery to return to the initial situation and the potential losses. We can also see the ratio of the recovery to loss. As we see, from 20% of losses, we would have to recover 25%.

It does not seem reasonable to assume losses of more than 20% considering that the growth of the necessary revaluation begins to have an exponential growth.

The reasonable limit to limit losses following this example should not exceed 10-12%. Although it should be noted that there are other variables to consider, such as the volatility of the asset in which you invest, the time frame, etc.

In conclusion, recovering the losses of your stock portfolio is not really easy, as breaking a trend is complicated, but breaking it and reversing it by more than 40% or 50%, is practically impossible. However, let's remember that this is the stock market and as Keynes said, “Markets can stay irrational longer than investors can stay solvent.”

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FAQs about investment loss recovery

What is the value of rate of change (ROC)?

The value of rate of change oscillates around 0. It can be negative or positive. A positive ROC denots a rising trend, while a negative ROC indicates a downward trend. If the ROC is zero, there is no change in the value over time.

How Do I calculate profit on stock?

If you want to calculate the profit on a stock, you'll need the total amount you used to purchase the stock and the total value of the stock at the current price. You'll also need to know any fees associated with your transactions to calculate whether you're in loss or gain

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