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Dollars or Percentages: What Matters More?

| April 17, 2018
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What is the difference between a 30% loss on $1,000,000 and a 30% loss on $100,000?  Most folks would say $270,000. Working with hundreds of clients over the past 20 years, I would say the answer to that would be sleeping well vs. staying up all night watching reruns of your favorite 70's sitcom or maybe thigh master commercials in an attempt to calm the nerves.  Even though the percentage loss is the same in both scenarios, in the vast majority of situations, I've found it is much more difficult from a psychological standpoint for my clients to absorb larger dollar losses as their portfolio grows.   

For many investors, the stock market crash of 2007 - 2009 is a distant memory.  They were either to young at the time to be thinking about investments or still had many years or work ahead of them to accumulate assets.  Either way, the volatility you may have been comfortable with 10 years ago could be quite different today.  Why does this matter?

Here is an example:

2007 rolls around and Joe is 24 years old, single with only a few thousand dollars of student loan debt.  He has managed to save $25,000 in his 401(k) and is excited at the    prospects for future gains.  By the end of 2009, Joe's aggressive portfolio has declined to $15,000.  Joe says to himself "not to worry, it's only a $10,000 loss and I have a lot of time to make it up.  Really it's only like 2 months of work so not a big deal".

Fast forward 12 years to 2018 and Joe is now 36 years old, married with 2 kids, has a $300,000 mortgage and is looking at college expenses in the next 5 - 7 years.  Joe has done a fantastic job of investing and accumulated about $400,000 in his 401(k).  If he were to experience the same percentage decline in his portfolio as 2007 - 2009, he would be looking at a paper loss of approximately $160,000.   Now Joe says to himself, "I have to work 2 years to make up those losses and it's going to take over a 65% gain to make back that 40% loss.  

Most younger investors with smaller portfolios experience these investing thoughts:

  • I am young so I can take more risk.  This often equates to more volatile swings in the portfolio.
  • What I lost is a small percentage of my pay.  I can easily make that back by working harder.
  • I am young and have time on my side
  • Losses are no big deal, I don't have anyone else to take care of but myself
  • Even with the losses I make more than enough to cover my debt
  • I'm new to this investing thing...this is just how it is
  • I'm young and generally have an optimistic outlook on life

Most older investors with larger portfolios experience somewhat opposing views such as:

  • I am older therefore I should be taking less risk with my portfolio.  Why is it still moving up and down (less risk does not mean no risk)
  • What I lost is a large percentage of my pay.  It will take me years to make back the losses.
  • I am going to retire at some point, I don't have time on my side any more.
  • With a wife, kids, college coming, etc. how am I going to make up that money.
  • I've seen this before, it's going to keep going down.
  • I've graduated from the school of hard knocks.  I generally have a less optimistic view of the future.  

The risk we take by increasing our focus on the dollars and less on the percentages as we age can have a detrimental affect on our long-term ability to be successful investors.  I'm an advocate for making most portfolios less aggressive as time horizon and tolerance decrease but it should be done with a focus on overall risk, not potential dollar declines.  I've too often seen that focusing on dollars and not percents as you get older causes you to be more conservative than might be prudent, adds more stress and dictates more unnecessary portfolio changes.

What steps can you take to help keep the larger dollar swings from overwhelming you?

  1. Focus on percents not dollars.
  2. Write down maximum percent change you are comfortable with and stick to it.
  3. Most product sponsors provide monthly or quarterly statements showing dollar changes, you should look at these as percent changes whenever possible.
  4. Compare your percentage changes to those over the overall stock market.
  5. Maintain a healthy emergency account (3 - 6 month minimum) to help ride out market volatility.
  6. Keep debt to a minimum.
  7. Contact your trusted Financial Advisor to compare your risk tolerance to your portfolio to ensure they are in alignment.

Following a few simple steps might help you make better long-term portfolio decisions and have the added benefit of a better night's rest!

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Spencer Corzine, has been helping clients understand their investments and reach their investing goals for over 20 years.  He is a Certified Financial Planner (CFP®), a member of the Paladin Registry and resides in Austin, Texas with his wife and 6 children.

Serving clients in upstate New York, the Austin Texas area and over 20 other states.

Email: [email protected]

Website: www.avhinvest.com

LinkedIn: https://www.linkedin.com/in/spencercorzine

Direct Toll-Free Telephone: 877-738-7018

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