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How Did Investors Fare Market Crash 2020?

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Chambers Financial Group

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Some Truths about Compounding

Compounding is the process whereby reinvested returns result in the investment earnings increasing exponentially over time. A simpler definition might be: "when you earn interest on your interest." Over time, you earn not just on your original investment, but also on the earnings themselves. This is the basis for the idea that if someone forgot about $5 in a bank account during the Civil War, today it would have grown to millions due to compound interest. The chart below shows how geometric growth looks. Notice the line is not straight, but curved, and the curve becomes increasingly pronounced. This is called the "hockey stick."

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The Arithmetic of Loss

If you played King of the Hill as a child, you'll remember the goal was to beat the other kids to the top. Not easy (at least it wasn't for me). But going down the hill was a breeze. The other kids and gravity were always ready to help! It's easier to go down than up - this is the world of physics. The principle for how this applies to investments is called the Arithmetic of Loss. The math: losses hurt more than gains help. For example, losing 5% is more negative than gaining 5% is positive.

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