WHAT IS "REVERSE COMPOUNDING"?

Most investors are familiar with the "Magic of Compounding Interest", but what they fail to realize is that it works in reverse as well. This "Damaging Power of Reverse Compounding" graph (below) shows how much an investor must gain back at various levels of portfolio losses. With a 10% loss, an investor must gain 12% to be back to even. With a 20% loss, the gain must be more than two times that at 25%. As losses become more extreme, so does the reverse compounding. With a 60% loss, an investor needs to make back 150% to break even and with an 80% loss, they have to gain 400%!