Percentages are always two-part. Change relative to base.
People get swept up in one number amounts, like percentages, and lose track of meaning. The source of the confusion is frequently using one base for two different calculations.
Think about converting currencies
If the Canadian dollar is 75 cents versus the American dollar, it is at a discount of 25%. If I go to the bank to buy US dollars I will pay $1.33 for each. More given bank service charges and markup. What happened to 25%? The 25% discount relates to the hundred cent US dollar while the 33.3% markup relates to the 75 cent Canadian dollar. $1.00 either way.
Same idea in retail.
100% markup provides a 50% margin. Margin relates to the selling price. Markup relates to the cost of the goods.
Why avoid investment losses
Because if you lose 20%, you need a bigger gain to get back to even. A 25% gain to be precise. Different base. A 25% gain on $80 brings you back to $100.
If you were expecting appreciation, it is worse. If the plan is to earn 6% on average, $100 will be $112.36 in two years. If instead, year one is down 20%, year two must be up $32.36 to average out. A little over 40%.
Not many years make 40%.
Smart investors are very sensitive to potential losses. The first rule of making money by investing is:
“Don’t lose money. “
It is harder than many people think to get it back.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772