Ten percent solution

What does it mean to have protection from market changes?  Let me give you an example.  First, I will take an investment that pays me 10% the first year, loses 10% the next year, pays another 10% the next year and so on.  If you were to take five years at plus 10% and five years at minus 10%, the average return should be zero.  That is, you should have as much money at the end as you started with ten years ago.  That would be nice, but it is a little like hoping your one A in Art is going to compensate for your two C's in Math and Science. 

Start with $100.  The first year you make $10, and let's assume you don't have to pay taxes on the growth.  That leaves you with $110.  The next year you lose 10% or $11.  Now you are down to $99.  In my graph below, I carried that logic out for 14 years. 

My $100 shrank to $85 losing $15 from my beginning balance.  I don't like that result. 

What if I were able to get something that always let me have the positive 10% growth when it happened, and then didn't pay anything when the return was negative.  How would that look?  In my first year I earn $10 and the next year I earn nothing, but I keep my $10.  The next year I earn $11 bringing my balance up to $121.  I like that much better.  Let's see how that looks over 14 years again.

In just 14 years, with protection, my account grew to $177.  How does that look in comparison to my other result?  I think it looks a whole lot better.  But 10% each year isn't really possible, is it?  In my next article I will give a real world example.