Why You Need to Watch Percentages and Yo-Yos

Why You Need to Watch Percentages and Yo-Yos

A radio show listener called me a couple of weeks ago. She owned an investment that fell 10% one week and rose 10% the next, but she still had less in her account after the second week. Why wasn’t she back to break-even?

You can thank percentages.

Let me illustrate. If an investment goes down 10% one day, it has to rise 11.1% for you to get back to where you were.

Say you start with $100. A 10% drop takes you from $100 to $90. But to get back up to $100 from $90, you need a gain of 11.1%.

Try this: Your investment drops 50%, then rises 50% and then rises another 33%. The $100 you started with is now worth…the same $100.

This is why I’m always encouraging our clients, “Don’t look at dollars. Focus on percentages.”

Yo-yos hold another lesson in volatile markets.

Picture a boy playing with a yo-yo. As the yo-yo goes up and down, it seems he's not accomplishing a darn thing. But if while playing, he's been climbing a hill, the yo-yo that’s bouncing up and down (volatility), is doing so at ever-higher altitudes. The height of the yo-yo is rising even though it seems to merely be going up and down pointlessly.

That potential is what enables you the opportunity to enjoy long-term profits.

Read here, in my annual client letter, about why we’re confident about the prospects for investors, but vigilant about the dangers that lurk.