Asymmetric and Exponential Nature of Losses
Losses are asymmetric: it takes a lot to make up for losses because losses compound exponentially. As the chart shows, it takes a gain of 43% to recover from a loss of -30%, a gain of 100% to recover from a loss of -50%, a gain of 233% to recover from a loss of -70%.
But, it works both ways, too. If take only a -70% decline to erase a 233%, a -50% loss wipes out a 100% gain, a -60% decline erases a 150% gain. You can probably see why its crucial to actively manage the downside. We cannot manage or control the upside, but we can manage and control the downside through active risk management.
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