When the market value of investments declines, it’s natural to fear of falling short of your goals. Understanding Loss, Relative Loss, and Relative Gains can help alleviate such fears.
● Loss: Performance Loss occurs when a portfolio’s value decreases due to changing market conditions or a fall in a company’s earnings.
There are, however, more nuanced ways of understanding Losses.
● Relative Loss: Any fund’s performance can be compared relative to a benchmark index. This is a measure of opportunity cost relative to an index like the S&P 500. When an investor experiences a Relative Loss, their investment may increase in value, but rise less than it would have increased had you invested in the benchmark, itself.
For example, imagine that you invested in a mutual fund whose price increases 3% by year end. Even though the fund’s value has increased, you might still experience a Relative Loss if the S&P increased by 10% during that same time period.
Relative Gain. On the other hand, you can lose money in a fund but still have a Relative Gain if your own investments lose less than the benchmark index. If your funds lost 2% of their value but the S&P lost 5% of its value, you would have had a Relative Gain even if your investment declined in value since you lost less than the benchmark.