This is what many people don’t understand, and is one of the rea- sons why money is such an emotional thing. For this reason, I rec- ommend that during a bear market, clients don’t look at their accounts on a regular basis. Many clients of mine like to check out the markets on CNBC, as well as their accounts, every day. Even dur- ing a bull market, when account values are consistently going up, this isn’t a healthy practice.
HOW MUCH HAVE I LOST? HOW MUCH HAVE I GAINED?
During bear markets, clients will come in and say they have lost X amount of money. By looking at their account statements, I know exactly how much their portfolio has declined. However, when I speak with the client, their number is always more than what the actual decline is. Why is that? The tendency is that when calculating the loss, people use the highest figure to the present.
For instance, one of my clients came in and told me that she had lost a substantial amount of money, when in fact she had only lost $5000. When she calculated her loss, she used the account value from March of 2000, which was the peak of the NASDAQ and Dow Jones indices. She didn’t account for what her original investment was. She took her peak account value and subtracted the current value from it.
Unfortunately, she’s not the only person who does this. When assessing your account positions, it’s vital that you remember where you started. Just because your accounts reached $1.2 million and then dipped to $800,000 doesn’t mean you lost $400,000. If your ini- tial investment was worth $750,000, then you still have a net paper gain of $50,000.
Notice that I said “net paper gain.” This is just like the paper losses. The gain isn’t really your money until you cash out of your position. It’s merely a rise in your account value. If you put $750,000 into the market and then sold off all your positions for a total of $925,000, then you have made $175,000. If you don’t, and you hold your position, then the increase in the account value isn’t an actual gain; it’s just a paper gain.