How to Look at Performance Gains and Losses

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.