Ali invested $100,000 in 2007. As he finally decides to see how’s his investment is doing, he realizes that he lost $40,000 in the unit trust DWS China Equity fund and now he is left with $60,000. After consulting his adviser, the adviser realizes that Ali still have $50,000 investible amount in his bank reserves and suggested Ali to top-up his current investment. “Why should I put in more money into this investment when it made me lose money?”, Ali questioned. The adviser did the math for him:
In order to recover his $40,000, DWS China Equity Fund has to yield 67% to bring up his $60,000 balance to $100,000.
If Ali adds $50,000 to his investment, his new balance will $110,000. His total invested amount is now $150,000. Still $40,000 short, but mathematics later reveal that DWS China Equity Fund has only need to yield 37% to gain his $40,000!
Would it be easier to yield 67% or 37%? The answer is obvious. What if instead of adding $50,000, he adds $100,000 to his current balance instead?
The DWS China Equity fund would only need to yield 25%! Ali would get back his $40,000 much faster than before!
