Monday, August 24, 2009

Risk: "It's the Dollars, Stupid!"

the WSJ's Sunday Journal included a piece on What You Should Know About Risk. A quote from Vanguard's Fran Kinnery, explaining why losses need to be looked at in dollar terms, caught my eye:
"We believe investors are somewhat immune to percentages.Thirty-two percent doesn't have the same impact for someone who has $100,000 as if you said that now they only have $68,000."
He's right, at least in my case. The other day I noticed a listing of the worst bear markets in a Merrill Anderson newsletter. The most devastating, of course, was September '29 - June '32. The value of the S&P 500 dropped 86%.

But that plunge was followed by a 57-month bull market in which the S&P climbed a stupendous 324%. Gee, maybe that bad old Depression wasn't so bad after all.

But it was, measured by dollars. An investor with $1 million in stocks in September '29 had only $140,000 left in June '32. And that "stupendous," 324% recovery only brought the value of his battered portfolio back to $593,600.

Moral: Use dollars to help investors assess risk. Use percentages when they need panic relief.

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