|
Posted on January 23, 2013 @ 08:34:00 AM by Paul Meagher
If you had money invested in the stock market over the last few years, you have probably seen the value of many of your stocks go down.
There has been a bit of a rebound in the last year so the hope is that the value of our portfolios will recover back to the levels we were at before
the dip in the markets.
The math of recovering from a percentage loss in portfolio value is trickier that you might intuitively think it is. This is because when you
lose 50 percent of the value of a stock, and then you gain back 50 percent, you don't get back to where you were before the 50 percent loss. You only get 75 percent of the way back; you are still at a 25 percent loss.
A simple formula that you can use to figure this out is:
(1-x)(1+x) = 1-x2
So if your portfolio shrinks by a factor of 1-x (where x = 0.50 in this example), and then grows by a factor of 1+x in the following year, the net change in overall value of your portfolio is a factor of:
(1-x)(1+x)
Which is equal to:
1-x2
If x is 0 you don't gain or lose value in your portfolio (1-0 is equal to a factor of 1); however, if x is any value greater than 0 then you don't recoup your losses (1 - 0.52 is equal to a factor of 0.75).
The moral is that it is not as easy for your portfolio to recover from a bad year as you might intuitively think it is.
|
Looking for Investor for a Restaurant/Bar Opportunity 
