Welcome to the Financialoscopy Lab where we go through numbers, but almost as important, we go through the psychology of numbers that most people don’t realize is a large part of the decision-making process, both the good decisions and the bad decisions that happen in your life. The new Financialoscopy Lab is a place where we can think, we can dissect, and we can research together with clients.
Let me talk about numbers. Let me talk about rates of return. Let me talk about psychological losses. We are going to begin with our numbers very, very small and work up from there. This has been kind of an interesting year where it has been somewhat funky because people have seen more negative numbers than positive numbers. Unless, of course, you’re talking about the increased price of gasoline, but basically in the market we are seeing negative numbers more than anything else. So, let’s talk about the psychology behind the negative numbers.
Let’s say that you have $10,000. If you have $10,000 and you have a 10% loss, that means that you have lost (10% of $10,000) $1,000. Now based on $10,000 that might not seem like that much money. You’d likely tell me that you’re going to weather the storm and that’s life and you’re just going to have to learn to live with that. But let’s do a progression. Let’s go up a little bit further.
Let’s pretend that you had invested $100,000. If you had the same 10% loss, that would mean that you had a loss of $10,000. Now I should probably at this point in time say that you only realized a loss if you sold out of the market at that time when it was down. If you did not sell out of the market at that time with a 10% loss, then that just means that the value of your account is less right now, but you have not solidified that loss. But a lot of people will get their statement, and they will be shocked that out of $100,000 they lost $10,000.
Now, let’s go up a little bit further. We have clients in this area where there may be $1,000,000. 10% of $1,000,000 is a decrease of $100,000. So, if a person had $10,000, they might realize that they are down $1,000. If they have $100,000, they might realize and weather the storm that they’re down $10,000. But with $1,000,000 all of a sudden someone who is new to the investment game may say “Mark, I have never made that amount of money, in one year, during my entire lifetime (that I just lost!)”. They are emotionally distraught. Especially if they have come in to the money newly/recently. For example, say it was an inheritance.
Here's where the psychology is kind of an interesting in the way that this plays out; a person that has $1,000,000 that they have earned over time has had the experience of the market going up and the market going down. They have weathered those storms. So, a person who has “old money”, old money that is in the market that they have earned and they have realized the ups and downs because, again, they have weathered the storm. A $100,000 loss is not going to be appear to be that big of a problem. They just realize that that’s part of the game that they have to play. To a person who recently came in to $1,000,000, this is a devastating number. Even though if they had had $100,000 or $10,000 and realized the same negative rate of return, they would have acted entirely different.
Here’s something that you have to realize: if you didn’t need to take the money out right now, it doesn’t make as much of a difference. There have been better days. There have been worse days. We realize that things will go up and down over time; that is the way that the market works. But if a person doesn’t need the money right now, again, there is no solidified loss unless a person pulls out when the market is down.
Remember: Buy Low, Sell High. If you don’t need the money, let it ride. Those are the numbers and that is the psychology that I wanted to share with you today at the Financialoscopy Lab. If you would like to have more information or if you would like to visit with us or run some numbers at the Financialoscopy Lab, contact us and perhaps it is time to schedule your Financialoscopy.
