An RWA Pays 10% a Year. What Happens if the Asset Falls 20%?

But what happens if the investment falls 20% in value?

You would have $16,000 left in the investment, plus the $2,000 income you received. That’s $18,000 altogether: an overall loss of $2,000, or 10%, before fees and taxes. You received the income, but you still ended the year with less money than you put in.

As you can see, before investing in an RWA because of its attractive income, it’s important to check how much you could potentially lose if the investment falls in value.

We’ll show you what a price fall could cost you and how investing a smaller or larger amount affects the rest of your portfolio. We’ve also created a free Position Risk Check Tool to help you try this with your own numbers. You’ll find the link at the end of the article.

Income Is Only Part of Your Return

Receiving regular rent or interest can make you feel more comfortable with an investment. Who doesn’t like passive income? Alongside that income, keep an eye on the investment’s value, as both contribute to your overall return.

Your total return tells you whether you’ve made or lost money overall, counting both the income you received and the change in your investment’s value.

Suppose you invest $10,000 and receive $800 in income over the year. If your investment falls in value to $8,500, you now have $9,300 altogether: $8,500 still invested plus $800 received. You’re $700 below where you started, an overall loss of 7%, before fees and taxes.

To keep the examples below easy to follow, we assume you receive a full year’s income based on the amount you originally invested. You keep that income as cash rather than reinvesting it. We leave out fees and taxes unless mentioned. The figures show how the calculations work, not what an investment will earn.

FINRA explains this distinction in its guide to return and rate of return.

Check what the advertised percentage includes. Does it mean income paid to you, an annual percentage yield (APY) that assumes you reinvest your earnings, or an estimated total return that includes a rise or fall in the investment’s value? These are different calculations. If the figure already includes a change in value, don’t add that change again.

Can the Income Cover a Fall in Value?

Suppose you put $10,000 into an RWA and receive $1,200 in income over the year, a 12% return from income alone. The table below shows whether you would make or lose money overall if the investment fell in value by different amounts.

A 12% decline would exactly offset the $1,200 income in this example. If costs reduce the income you keep, a smaller decline would be enough to leave you losing money.

Ask yourself: how much would my investment need to fall in value to cancel out a full year’s income? Then consider whether the investment you’re looking at could realistically fall by that amount.

The Type of Asset Matters

A tokenized stock, property investment, private loan and Treasury fund should not all be tested against the same assumptions. Their values and income respond to different risks.

A stock can fall sharply while still paying dividends. Property values can fall while rent continues to be paid. Private credit can lose value if borrowers struggle to repay. With Treasury investments, maturity and sensitivity to interest rates matter: longer-dated fixed-rate bonds generally react more strongly to rate changes than short-term bills.

The SEC’s explanation of bond interest rate risk shows why rising market rates generally push existing fixed-rate bond prices down. Falling rates generally do the opposite.

Also check how changes in the underlying asset affect your holding. A property falling 15% does not necessarily mean your investment falls 15%, especially if the structure uses debt. For the calculations in this article, the decline refers to the value of your investment itself.

A Steady Valuation Does Not Guarantee Safety

A private credit investment might show the same value on your dashboard for months. That can look safer than a stock whose price changes throughout the trading day. But the difference may partly reflect how often the investments are valued.

Private loans may rely on periodic valuations and estimates of what borrowers will repay. Problems can become visible through a write-down, restructuring or default rather than a series of small daily price changes. Just because the value shown on your screen hasn’t changed doesn’t mean you can’t lose money.

What if Your Income Falls Too?

A decline in value is more painful if the income you expected also falls short. Imagine putting $50,000 into a property investment expected to distribute $5,000 over the year. Instead, vacancies or unpaid rent reduce the actual distribution to $3,000, while the value of your holding falls to $42,500.

You received $3,000 but lost $7,500 in value. Your overall result is a $4,500 loss, or 9% of the original investment, before fees and taxes.

The $3,000 payment is 6% of your original $50,000. Check which amount a quoted rate applies to: 6% of the reduced $42,500 value would be $2,550. If the income rate changes during the year, you also need to account for how long each rate applied.

This combined stress can make sense for property with falling rent or credit with disrupted payments. It is not a universal pattern. For a fixed-rate bond, a lower market price can increase its quoted yield even when its cash payments stay unchanged.

Higher Income Still Needs an Explanation

An investment offering 15% annual income could pay you $3,000 on a $20,000 investment, if all goes well.

That income may look attractive, but ask why the rate is so high. Are you lending to borrowers who may struggle to repay? Could your money be locked up? Does the investment use debt, which can increase losses? Or is some of the advertised income paid in reward tokens whose value could fall?

Also check how much income you’ll receive after fees. A 10% annual yield on $50,000 would pay $5,000. If fees reduce that to 8%, you would receive $4,000. An 8% fall in your investment’s value would cancel out that full year’s income.

At GnosisFi, we’re excited about quality RWAs because they open up more ways to invest in assets and earn income. We want to help you explore those opportunities and feel confident asking the questions that matter.

Rental properties can produce regular income, bonds can pay interest, and stocks can pay dividends. Private credit and invoice financing offer other ways to earn income by lending to businesses. With careful selection, investments with different sources of income can help you build a more diversified portfolio.

There’s plenty to explore, and that’s what makes this sector so interesting. Understanding how each investment works puts you in a better position to choose opportunities that suit your goals.

How Much of Your Portfolio Are You Putting at Risk?

The same investment can have very different consequences for two investors. Suppose each puts $20,000 into the same RWA. One has a $1 million portfolio; the other has $100,000. The position represents 2% of the first portfolio and 20% of the second.

If that holding loses half its value, both investors lose $10,000. But that is 1% of the first investor’s portfolio and 10% of the second. These calculations use the portfolios’ starting values and assume the other holdings stay unchanged.

To calculate the effect on your own portfolio, multiply the share invested in the position by the decline you want to test:

5% of your portfolio × a 50% fall = a 2.5% portfolio loss

A 50% fall is a severe scenario, not a prediction. It can be useful for a higher-risk investment because it makes the consequences clear. A complete loss is worth considering where default, fraud or structural failure could put the whole position at risk.

Other investments may also fall at the same time. This calculation isolates one holding; it does not measure every risk in your portfolio. Several tokens backed by similar assets or dependent on the same issuer can share risks even if they have different names.

Recovering a Loss Takes More Than the Same Percentage Gain

If an investment falls from $100 to $80, it needs to rise $20 to return to its starting value. That $20 is 25% of the remaining $80, not 20%. Larger losses make the recovery steeper:

These figures describe recovery through an increase in the investment’s value alone.

Cash income can also help recover a loss, but the amount and timing matter.

After a $20,000 investment falls to $16,000, unchanged cash payments of $2,000 a year would offset that $4,000 decline over two years, ignoring costs and any further changes. If payments instead equal 10% of the remaining $16,000, they would be $1,600 a year. Neither calculation guarantees the income will continue or the value will stop falling.

Check the Size Before You Invest

Take the amount you are considering and test a few declines that make sense for the asset.

On a $20,000 holding, a 10% fall costs $2,000, a 25% fall costs $5,000, and a 50% fall costs $10,000.

Compare those amounts with both the annual income and your total portfolio. Then consider when you need the money. An investment you cannot sell or redeem for months may be a poor fit for money you need soon, regardless of the advertised yield.

You might like the investment after doing this exercise but decide to put less into it. That is a useful outcome. Finding an opportunity and choosing how much money to commit are two separate decisions.

Test Your Numbers With Our Free Tool

Before investing, use our free Position Risk Check to see what a fall would cost you and how large the position would be within your portfolio.

Enter your figures and test different declines before committing money. Our tool shows hypothetical losses, not price predictions.

Smart investing starts with understanding what you’re putting your money into. Our RWA Masterclass helps you build that knowledge, covering how tokenized investments work, where returns come from and what to check before buying.