After just three up days in the market, some people are starting to check their account balances to see how much of their losses have been recovered. If only it were so easy!
Here's a depressing lesson in portfolio math that we'll all need to keep in mind as we (hopefully) dig out of the hole the market has fallen into since last summer. When the market drops by any percentage it always needs to rise by a greater percentage to get back to where it started. Take this simple example:
Say the market index you are using is at 100 and drops suddenly by 50%. Now the index is 50. If it rises 50%, the index will not be 100 again, it will be 75. It has to rise 100% to get back to your starting point of 100.
How does this translate to what's going on in the markets? Using the S&P 500 as a measure, the market lost over 56% of its value from the high in October 2007 to the low (to date) on March 9. To make it back to that 2007 starting point the market needs to gain 130%. The 10%+ gains we saw this week are a start, but we have far to go.
Annette Simon
Copyright 2009 Money Dames
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