The Biggest Loss Still Lies Ahead

“I'm over a million poorer than I was at the start of the year!”, a portfolio management client told me in October 2022, with a slight hint of reproach in his voice. Important context: the securities account in question had previously been a considerable 10 million euros. The setback was therefore “only” 10%. 

Nobody enjoys suffering a setback. Who wouldn't prefer a small increase every day and an annual return of 8%? However, setbacks that make us nervous are the price we pay for the value growth we hope for. For most people, a 10% decline does not yet trigger this anxiety. In this particular case, it was different: the portfolio consisted largely of bonds, and large price declines had been uncommon in the past. 

“Someday in the distant future, we’ll go through another difficult phase like this. When that happens, I hope you’ll be telling me that you’re a full 10 million euros poorer from the peak.” I admit, my statement was provocative, and the client was understandably taken aback. 

Surpassing previous highs

As our conversation continued, I explained that the biggest loss always lies ahead of us. If we invest successfully, the value will increase over the years. As long as we don't spend the money or lose confidence and sell everything in difficult times, our investments will reach new highs once again. 

It’s simply the nature of things that future euro and dollar losses will be higher than today. Unrealized losses on paper, mind you. Equities will exceed their previous highs, and bonds will be redeemed at a price of 100. Not every single position will be successful. What matters is that your portfolio’s overall performance meets expectations.

Perhaps my remark about the 10 million setback was overly optimistic. After all, for that to occur, the portfolio would need to increase tenfold first. Given the client’s choice to allocate a majority to bonds, this won’t be feasible. But anyone who invests in equities for a lifetime will eventually experience this as well. 

The greatest loss may always lie in the future, but that doesn’t scare us. October 2022 marked a low point on the stock market. Our portfolios have resumed their positive performance since then, much to our investors’ delight.