If there is a correction in the stock market, an equal return of investment is not sufficient to recover the previous fall in the market, and a high ROI is required to do the needful for you.

Yes, you are reading correctly.

In case the market falls by 10%, you may be thinking that again, if the market rises by 10%, your capital will be fully recovered.

Actual fact is different.

Let’s learn more about it.

% ROI required to recover the capital?

Extra roi required if the market corrects by 10%?

Let’s assume that you have invested 1 lakh in the market and the market fell by 10%.

As a result of that, your capital will also fall by 10%, right?

You can see in the above image that the capital became Rs 90,000 after a 10% fall.

How much ROI is required to recover the capital?…

If you see in the above image, present capital is Rs. 90,000, and capital required is Rs. 1,00,000.

But the rate of return required is 11.1%.

Here, you may have been surprised, right?

But this is true: if there is a correction of 10%, there must be a gain of 11.1% to recover the loss due to the correction.

Which is more than the market correction% that we have assumed (10%).

Extra return required if market correction is 25%?…

 

Here, in the above image, you can see that 1 lakh capital became Rs. 75,000.

And the correction expected is 25%.

How much Roi is required to recover a 25% fall in the market?…

Here, the new capital is Rs. 75,000.

and the future value of capital required is Rs. 1,00,000.

Again, you can see in the above image that a 33.3% rate of return is required to recover the full capital invested.

% ROI required if the market correction is 50%?…

 

Now, as seen in the above image, the original capital invested is Rs. 1,00,000.

and market correction expected is 50%.

After the fall, the capital became Rs. 50,000.

How much rate % is required to recover 50% of the fall in the market? …

Here, in the above image, you can see that the new capital is Rs. 50,000.

and the new capital required is Rs. 1,00,000.

Again, you can see that the rate of return is 100% in this case.

Finally, after seeing all the scenarios of market correction%, it is very clear that when there is a fall, a higher% roi is required than the actual fall%.

Moreover, the ROI required is increasing significantly with a significant fall

Hence, it is very important to protect your capital from these heavy falls.

and this can be done with the help of asset allocation only.

In addition, investing 100% of your funds in the market is not good.

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