Did You Lose Money in the Coronavirus Crash?
I was helping a friend who is new to investing and she asked a very good question. She wanted to know if she lost money in her retirement account during the coronavirus crash. That led to a longer conversation, part of it about what constitutes “losing money.”
How We Look at Value
When we invest for retirement, we typically look at one number – the total value of our account(s). Our mind then focuses on the all-time highest value, or perhaps the recent value before a big decline. So if your account was at $100,000 and fell to $80,000, you’d likely say “I lost $20,000.”
Except you didn’t.
As I told my friend when our account value declines we don’t actually lose money unless we sell. Values will rise and fall, but selling locks in the loss. If you have years to go before reaching retirement, it’s very likely that you will regain that $20,000 and much more – especially if you continue contributing (See why most investors should stay-the-course).* So while the “total value” of your account may go down, and that may feel like a loss, it isn’t.
But, there’s a deeper way to look at this that is really more encouraging.
Appreciation for … Appreciation
If you search hard enough, you’ll likely find a number that reflects your lifetime contributions to your investment account. In other words, the total amount of money you’ve put in through the years. Subtracting that from the current account value gives you your total appreciation. That’s the true way to determine if you’ve gained or lost value on what you’ve invested.
And if you’ve been investing consistently for many years and making an average rate of return, it’s unlikely that you’ll ever see a loss of total appreciation by using this metric.
How it Works
In our example, let’s say that $100,000 was reached after contributing $3,500 a year for the past 15 years at the average rate of return for the S&P 500 (8.2%). Your total investment is $52,500. Even if your account value fell from $100,000 to $80,000, you still have a net gain of $27,500 or 52%.
It might hurt to suffer through a – hopefully temporary – loss in your account value, but the pain should be lessened by realizing you still have a lot more money than if you hadn’t been investing at all.
What’s Your Number?
I encourage you to try this for yourself, particularly when we’re suffering through a market downturn. Find your total contribution number and do the math. You might be surprised to discover that not only haven’t you “lost” money, you’ll probably still be sitting on a pretty good return.
*As stated elsewhere, I am not a financial planner, and I am not making recommendations for your personal financial decisions. That’s why I recommend that you meet with a “fee only” CFP or similarly qualified investment professional to create your own retirement plan.
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