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Have you noticed how easy it is to tell yourself that you would be comfortable with a 10% drop in the value of your portfolio until you are seeing it losing $50,000, $100,000 or $150,000 or more . Dollars seem to have a greater impact on your tolerance.
"Behavioral Economics." So much depends upon psychology. The best thing I know how to do in times like these is to be patient, remembering what I have learned, and not to panic. It truly is counter-intuitive to BUY LOW. It takes "faith" of a sort in the very Markets that are beating you up at the moment.
Although it is all about the math, both are important to keep things in perspective. The % number gives you a broad view on the portfolio and the $ value provides an absolute number that we can relate to.
“Have you noticed how easy it is to tell yourself that you would be comfortable with a 10% drop in the value of your portfolio until you are seeing it losing $50,000, $100,000 or $150,000 or more . Dollars seem to have a greater impact on your tolerance.”
I decided a long time ago it’s best to view asset allocation in terms of percentages. So, theoretically, it doesn’t make any difference whether you’re managing $50,000, $500,000, or $5,000,000 when designing a portfolio and maintaining the desired allocation among different asset classes. There are some caveats: Fees tend to be higher for lesser amounts invested. And some lucrative investments may not be available for smaller sums. In that sense, dollar amounts may well influence investment decisions.
As @Bobpa correctly notes, looking at dollar sums can be gut-wrenching during falling markets as money seems to be “flying out the door”. More important, this can lead to hasty knee-jerk reactions we later regret. Another thing I noticed is that dollar sums appear to gain in importance once distributions begin. Up until then (during the working years) they’re largely “numbers” on a chart. However, once you begin spending those funds on real goods and services, your perspective changes. Suddenly you’re looking at “real” dollars in terms of what they can buy.
Post is from November 5, 2022, just a few weeks after the S&P dipped below 3,590 on October 12. That was its low for all of 2022 and lower than where it ended 2020. (Thanks @Yogibearbull for helping on the date.)
One can live off dollars, one can’t on percentages. Although I understand on an abstract level removed from your actual life, it’s “all about math,” in reality in one’s life, it is not at all. This is especially so if one worked for those dollars, spent the fleeting hours of one’s life earning them.
Psychologically, it’s quite interesting. Think about if you found $100 on the street and lost it versus if you worked eight hours, gave your entire day to earning that $100 and then lost it. Would it feel the same? It’s why when losses eat into the principal you invested instead of just erasing gains you already made on top of your principal it feels worse. And losing $50,000 is always going to feel worse than $100 even if in percentage terms they’re the same, especially if that $50,000 is the equivalent to a year’s salary for many Americans and they now need to live off that $50,000 in retirement.
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As @Bobpa correctly notes, looking at dollar sums can be gut-wrenching during falling markets as money seems to be “flying out the door”. More important, this can lead to hasty knee-jerk reactions we later regret. Another thing I noticed is that dollar sums appear to gain in importance once distributions begin. Up until then (during the working years) they’re largely “numbers” on a chart. However, once you begin spending those funds on real goods and services, your perspective changes. Suddenly you’re looking at “real” dollars in terms of what they can buy.
Post is from November 5, 2022, just a few weeks after the S&P dipped below 3,590 on October 12. That was its low for all of 2022 and lower than where it ended 2020. (Thanks @Yogibearbull for helping on the date.)
Psychologically, it’s quite interesting. Think about if you found $100 on the street and lost it versus if you worked eight hours, gave your entire day to earning that $100 and then lost it. Would it feel the same? It’s why when losses eat into the principal you invested instead of just erasing gains you already made on top of your principal it feels worse. And losing $50,000 is always going to feel worse than $100 even if in percentage terms they’re the same, especially if that $50,000 is the equivalent to a year’s salary for many Americans and they now need to live off that $50,000 in retirement.