Lost 50% On An Investment? Here's How To Recover Principal Amount

A 50 per cent fall in an investment can look like just another number on a portfolio statement. But mathematically, the damage is much an investment falls 50 per cent, it needs to gain 100 per cent just to return to its original value.A Rs 1 lakh investment that falls 50 per cent is left with Rs 50,000. A 50 per cent gain on that Rs 50,000 adds only Rs 25,000, taking the investment to Rs 75,000. Therefore, the investor needs a 100 per cent gain on the remaining Rs 50,000 to get back to Rs 1 problem becomes more serious when the money is tied to a specific financial goal. The amount available has fallen, but the deadline has Much Gain Is Needed To Recover From A Loss?The mathematics changes sharply as the loss gets Left From Rs 1 LakhGain Needed To Break Even10%Rs 90,00011.11%20%Rs 80,00025%30%Rs 70,00042.86%40%Rs 60,00066.67%50%Rs 50,000100%60%Rs 40,000150%70%Rs 30,000233.33%"The serious consequence of a large loss is that it narrows the investor's choices. The investor must now save more, wait longer, accept a smaller goal or take greater risk. There is no fifth route hidden in the mathematics," Vikram Subburaj, CEO of Giottus, an Indian crypto exchange, told NDTV.A 50% Loss Can Change The Entire Financial PlanConsider Rs 10 lakh set aside for a child's education five years from now. At an assumed annual return of 8 per cent, the money could grow to around Rs 14.69 lakh over five if the investment loses 50 per cent, only Rs 5 lakh remains. To reach the original Rs 10 lakh in five years, the remaining money would need to grow at roughly 14.87 per cent annually. To reach the original Rs 14.69 lakh target, however, the required annual return would be about 24.1 per AmountTarget After 5 YearsApprox. Annual Return NeededNo lossRs 10 lakhRs 14.69 lakh8%After 50% lossRs 5 lakhRs 10 lakh14.87%After 50% lossRs 5 lakhRs 14.69 lakh24.1%This is the real impact of a deep drawdown. It does not simply reduce the amount of money in the account. It raises the return that must be earned Recovering The Original Amount Is Not EnoughSuppose Rs 1 lakh falls to Rs 50,000. If the remaining Rs 50,000 earns 10 per cent a year, it takes about 7.3 years to return to Rs 1 the original Rs 1 lakh, if it had continued compounding at 10 per cent, would have grown to roughly Rs 2 lakh over the same period. So even after recovering the original investment, the investor has lost years of potential creates another hurdle. At 4 per cent annual inflation, the purchasing power of Rs 1 lakh would require roughly Rs 1.33 lakh after 7.3 years to remain Money Is Not Investment RecoveryInvestors can also close a portfolio gap by adding more money. But that is different from recovering the loss through investment an investor loses Rs 20,000 and then adds another Rs 20,000, the account may return to its earlier value. The investment, however, has not earned back the lost Rs 20,000. The investor has replaced it through fresh Find Out What Actually FellA 50 per cent fall in one stock does not necessarily mean a 50 per cent fall in the portfolio. If a stock accounts for 10 per cent of a portfolio and its price falls 50 per cent, the impact on the overall portfolio is 5 per the same stock accounts for 80 per cent of the portfolio, the portfolio-level impact is 40 per cent. The next question is whether the price has fallen or whether the investment case itself has deteriorated.A diversified equity fund can fall during a broad market correction. An individual company may decline because of debt, fraud or a deteriorating business model. A speculative asset can face a loss of liquidity or situations need different responses. "A lower price is not automatically better value. Averaging down makes sense only when the investment case remains intact and the enlarged position still fits the portfolio. Otherwise, the investor is increasing exposure to the very possibility that caused the loss," Vikram Break-Even TrapOne way to assess an investment after a sharp fall is to ignore the original purchase a simple question: If the current value of the investment were available as cash today, would you invest that entire amount in the same asset?If the answer is no, holding only because the investment is below its purchase price can become a original purchase price does not determine the asset's future same principle applies to averaging down. Buying more of an asset because its price has fallen is not automatically a sound strategy. Adding to an investment because it remains fundamentally attractive and its portfolio allocation has fallen below the planned level is a different Size Matters Before The LossRisk management starts before an investment falls. An investor could, for example, decide that no single investment should be capable of causing more than a 3 per cent loss to the overall an asset could plausibly fall 50 per cent, limiting it to around 6 per cent of the portfolio would keep the potential portfolio-level impact around 3 per cent, assuming the loss is exactly 50 per is not a guarantee. The asset could fall further, multiple holdings can decline together, and liquidity can point is to control position size before emotions enter the decision. "Position size is decided when judgment is calm. Recovery decisions are made after fear, regret, and ego have entered the room. Controlling the first decision reduces the pressure on every decision that follows," says Vikram.