Money–Did You Make It or Lose It?

By David B. Armstrong, CFA | Jan 25, 2021 | Invest My Wealth, Weekly Market Commentary

If you bought something at $10 and it increased to $40, you would have made $30…a 300% profit.

But if the price then went from $40 to $30, did you lose 25%?

Depends on your mindset.

I’d argue that while you lost 25% off the high, you still have a 200% return if you sell it at $30.

Lots of people don’t see it that way…because losses hurt way more than gains.

But there is more to it than that.

I don’t think it’s about how much actual money you made on the original investment. And it’s not about how much money you lost riding it back down from to $30 from $40.

Why? Because it doesn’t factor into answering the most critical question any investor should be asking themselves: “What’s the money for?”

While answering that question can be complicated, the attempt can be framed rather logically.

Money can only go four places – you can 1) spend it during your lifetime, and to the extent there is anything left over after you die, it can go to 2) family and friends you designate through a will, trusts, and estate planning, and/or 3) charity, and in some cases, 4) taxes.

Spend it, give it to friends and family, give it to charity, give it to the government…that’s pretty much it.

Remember, money is a tool. So, in reality, it’s less about whether you made 200% or lost 25% and more about how much progress your investments have made towards funding your desired goals and objectives.

Mentally frame those goals and objectives into spending over your lifetime, leaving predetermined amounts for family, friends, and charity, and ensuring you don’t “gift” anything to the government you don’t absolutely have to. 

Keep looking forward.

 

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