Losing less > Making the most

"Bear markets are significantly more dramatic than bulls. If there's one thing that doing this every day for 19 years has taught me, it is more about not losing too much in bad times and not about making the most during the good times," said the Zerodha co-founder Nikhil Kamath in a social media post recently. When investing, people often focus on pursuing the best possible returns. But what they forget is that with high returns in equity comes high volatility in the short term. At this point, you may argue that since equity has historically provided high returns in the long run, why should temporary hiccups (or volatility) matter? Why do we praise mutual funds that have better downside protection than their peers? Let's delve into numbers to answer these questions. Large drops require bigger bounces to break even If you have Rs 100 in your wallet and lose Rs 20, that's a 20 per cent loss for you. To return to your original capital, you need an equivalent amount of gain. However, since your base is lower, i.e., Rs 80, you'll need a 25 per cent gain [(20/80) * 100] to compensate for your 20 per cent loss. This is simple maths. As the magnitude of loss increases, the percentage gain required to break even rises disproportionately. For instance, a 50 per cent portfolio loss requires a 100 per cent return to recover. Big losses require bigger gains to break even Loss % Gain % required to break-even