When +2 - 2 Doesn’t Equal Zero

Intro to Portfolio Math

In investing, gains and losses aren’t equal. Over time, that math can cost you.

It seems obvious: if something goes up 2% and then down 2%, you’re right back where you started. But in investing, that’s not how the math works. And over time, that difference adds up.

Let’s break it down.

Market ups and downs don’t cancel each other out

Say you invest $100. If the market goes up 2%, you now have $102. But if it drops 2% the next day, your balance doesn’t go back to $100. It drops to $99.96. Why? Because 2% of $102 is a bigger number than 2% of $100.

Day 1: You start the day with $100. You gain 2% on that $100, or $2. You end the day with $102.
Day 2: You start the day with $102. You lose 2% on that $102, or $2.04. You end the day with $99.96

It’s a small difference, sure. But if that pattern continues (up 2%, down 2%) over and over again, your portfolio shrinks over time.

The Damage Adds Up

Now imagine that same pattern continues every day for 100 days. That back and forth movement would leave your $100 portfolio at about $98.02. Even though the ups and downs are the same size, you end up with less money.

This is the hidden cost of volatility. It erodes returns in a way that feels invisible day to day but adds up over time.

So What Does This Mean for You?

It’s a reminder that investing isn’t just about the average return. It’s about how returns are earned over time. Smooth and steady tends to beat wild swings, even if the swings average out.

This is why diversification matters. It’s why rebalancing matters. And it’s why having a long-term plan is so important when the market gets bumpy.

The Bottom Line

Volatility doesn’t cancel itself out. It chips away, slowly and quietly, unless you’re invested in a way that’s designed to manage it. The good news? That’s what smart portfolios and solid plans are built to do.