It’s a common refrain these days: “My portfolio is down 40 percent”. However, a more accurate statement would be: “I’m down 40 percent in the equities portion of the portfolio from the previous market peak”. Here’s why the dramatic drops in the stock market isn’t as bad as you think:
- The Sleepy Portfolio is an aggressive portfolio with 25% in bonds and cash. The portfolio is down 24% over the past year. The Sleepy Mini portfolio was started about one year back, near the peak of the previous bull market. Though it has a slightly more aggressive allocation (20% to bonds), due to periodic additions to the portfolio, it has fared slightly better than the sleepy portfolio – it is down 22%. I don’t want to trivialize the pain of losing one-fourth of a portfolio (our experience has been similar to the Sleepy Portfolio) but that’s a lot less than a loss of one-third or more. Investors with more conservative portfolios should be down a lot less.
- Unless an investor started by investing a lump-sum at the precise peak of the market, they may not be down that much compared to the book value of their investments. Take the Sleepy Portfolio, which was started in January 2005 with $100,000. Today, the total value of the portfolio is $100,700. Even with a drop of 24% over the past year, the portfolio is still slightly in the black.
