The reality of loss: it only becomes real when you sell

James McManus

read 4 min

The news of Russia’s invasion of Ukraine, and the uncertainty that it creates across Europe and the world, is concerning and unsettling for many people.

In acknowledging the uncertainty of what lies ahead in the coming days, weeks and potentially months, like geopolitical crises before it, we have seen turbulence in markets and consequently a drop in Nutmeg portfolios. When these types of events happen, it’s easy to second guess what action, if any, you should take. Should you reduce the risk level of your portfolio, or cash out of the market? Or should you take no action at all?  

It goes without saying that nobody likes to see the value of their portfolios going down. As professional investors, this is a feeling our investment team is very familiar with. In all market conditions, it’s our job to guide your portfolio through these environments and you can rest assured that we are working hard to ensure your portfolio is positioned appropriately.  

But at times like this we know the fear, the alarm, the annoyance – they are visceral. We won’t insult your intelligence and pretend to be soothsayers, we can’t guarantee when markets will reverse the downward trend we are seeing at the moment. But what we can do is learn from the past and use prior experience to help us behave intelligently in the future. 

What’s happening? 

Current market conditions feel unsettling because we stand in the eye of a storm. Global stock markets are in a rattled state because of geopolitical uncertainty – and if there’s one thing that markets hate, it’s uncertainty.  

In this state of market sell-off, with portfolio values falling, many people’s gut response is to engage in damage control, to limit losses. But is this the right response? 

Think about it this way. If your portfolio has gone down, this fall in value is not a confirmed loss – not yet anyway. It’s a potential loss, based on the sum value of your holdings at their current market price. 

It becomes real, and confirmed, only if we execute the decision to sell the assets and withdraw our money. Only then will the loss become crystallised, both in time and in our pocket. 

In difficult times, it’s easy to lose sight of this. But don’t forget that as well as moving down, markets do move up. That’s inherent in the meaning of that uncomfortable word, volatility. Over the long term, history shows us that markets tend to increase in value. Remaining invested reduces the probability of confirmed losses. 

History on our side 

Data on global developed market stocks over the past 50 years shows us that the probability of losing money on your investment goes down the longer you stay invested. The chart below is based on data from 1972 to 2021. See how the green line falls over time. What this shows is that no matter when you entered the market during the period, long-term investing drastically decreased your chance of losses. 

Source: Macrobond; MSCI World Equity Mid and MSCI Large Cap Total Return in GBP, 1 January 1972- December 2021 

The following chart emphasis this point further – the probability of positive returns goes up the longer you stay in the markets. If you had invested your money for a quarter, or 65 days, during that same 50-year period, your chances of making a profit sat at 66.1%. Investing for any one year would have generated a positive return 72.7% of the time, while investing for ten years increased your chances to 94.15%. 

Source: Macrobond; MSCI World Equity Mid and MSCI Large Cap Total Return in GBP, January 1971- December 2021 

Even looking at shorter periods, we see that by and large, staying invested and focused on the longer-term generates a better outcome. Take the S&P 500 index of the US equity market over the past 20 years, for example. The maximum potential loss (drawdown) one could make in each year looks bad – they are the red dots. But the maximum potential gain over the calendar year is always preferable to selling after the drawdown, see the green bars. In many cases, the full-year return was positive despite a large drawdown during the year. 

Source: Macrobond, S&P Financial, FTSE. 31/12/1999 to 31/12/2020. Annual returns & drawdowns use total return indices in local currency but do not account for fees. 

You have the power 

This kind of analysis does not take away from the stress we feel in the moment. Nonetheless, it’s important to put short-term changes into perspective. It isn’t over until it’s over. Losses aren’t losses until we sell, withdraw and confirm them. Although it may not seem that way, the power is always with the investor, because a loss isn’t real until you make it so. 

You can read more of our thoughts around volatility in a number of blogs which are linked to here.  

Risk warning 

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. 


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James McManus
James is chief investment officer at Nutmeg, having joined in 2015 from Coutts & Co. A self-confessed ETF geek, James is regularly quoted in the national and industry press and has been voted one of Private Asset Manager’s ‘Top 40 under 40’ in each of the last three years. James holds a BSc in International Business from Nottingham Business School, the CFA UK Investment Management Certificate, and the CFA Certificate in ESG Investing. He can be found tweeting @j_a_mcmanus

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