On... Making Mistakes

Nobody likes making mistakes, but it is inevitable especially in the world of investing. In a Coffee Can investing forum, Tom Gayner said mistakes become less important with time (something along that line). That got me thinking, and I created a scenario to have a look. The scenario is as follows:- You invested 20,000$ and split it into 10 stocks. (2,000$ per stock) After the first year, 6 of those stocks (12,000$) went to zero (in reality, this would not happen even if you try)! You just lost 60% of your portfolio value in a year. Investing is terrible?!

However, let’s look at what happens with the passage of time, assuming your remaining 4 stocks generate an annual return of 10% each.

After the 1st year, your portfolio lost 60% of its value and it takes you 10 years to return to your initial invested amount of 20,000$.  In 20 years, you would have increased the investment to  53,000$. That’s a gain of 169% with a total portfolio annual return of 5.07% (probably achievable since the ASX200 annual return is estimated to be about 10% with dividend reinvested). Now, lets plot in the 12,000$ mistake that you made in your first year and see how it compares.   

As you can see, the loss looks significant in your first few years but by the time you reach your 20th year, it doesn’t look that bad anymore compared to the total portfolio value. Of course, if you had lost 60% of your portfolio in 1 year, you would already have given up investing. But if you persevere and with a bit of luck, you should be adequately rewarded in time. So, if things are going well, why not stay invested for another 10 years and stretch your investing horizon to 30 years. Let’s have a look at what happens.

  

Oh wow, the red bar has almost disappeared! What more can I say except mistakes will become less important with the passage of time.