Losing Dollars vs. Losing Percentages

On Dollar Losses and the Irreplaceability of Direct Experience

Photo: Pixabay

It was late May 2019 when I decided to rollover my 401(k) from my old employer into my IRAs.  The process seemed simple enough:  Sell assets at bank 1.  Send the cash to bank 2.  Buy new assets at bank 2.  Voilà.

What I didn’t anticipate was how much anxiety I would get with over half of my money out of the market.  If stocks started to rise, I would be sitting on the sidelines earning nothing.  I was told that the time between the liquidation of my 401(k) and when my cash would be available for trade at my new bank was about one and a half to two weeks.  I just had to wait it out.  I thought to myself, “Two weeks should be fine.”  Then this happened:

Between when my assets were sold on May 31, 2019 and when I could finally re-allocate them on June 19, the market rose 6%!  In those 12 sessions the market surged while I had over 50% of my money in cash.  [Note: The rollover process took over 2 weeks because my old bank was delayed in selling my fractional share holdings.  Moral of the story: These things can take longer than expected.]

I knew that this was bad timing luck, but just how bad was it?  How often does the market go up 6% within 12 sessions?  Honestly, I should’ve just left it alone.  Who cares how often it happens, right?  I can’t change it now, so why bother?

Because I HAD to know.  I was compelled to know.  It’s in my nature.  So, I took the S&P 500 daily data since 1950 and plotted the distribution of all 12-session returns:

As you can see, the mass of returns is centered near zero with the average 12-session return being 40 basis points (0.4%).  However, as you can also see, there are also some fat tails (i.e. -30%, +20%).  So just how rare was a 6% return (or greater) in 12 sessions?  It happens about 3% of the time:

Just my luck.  97 times out of 100 I would have been better off had I sold at some other time.

I know missing out on 6% may not seem like much in percentage terms.  After all, as Jason Zweig pointed out, investors in the 1970s used to regularly pay 8.5% in load fees just to start investing in many mutual funds.  However, if you think about the foregone 6% in dollar terms, it can be unnerving.

Let’s pretend my 401(k) had $100,000 and I assumed it would grow at a real rate of 3% for the next few decades.  When I reach retirement that sum would be worth something like $250,000 in today’s dollars.  If you think of it this way, that extra 6% I missed out on represents $15,000!

That’s a few nice vacations or money I could have donated to a good cause that disappeared because of pure timing luck.  Of course, my portfolio wasn’t only invested in the S&P 500 nor was it worth $100,000, but you get my point.

You can’t analyze losses from the framework of pure percentages because you miss out on the psychological weight of what those could dollar losses could represent.  Foregone consumption.  Lost dreams.  Dissolved memories.

This is why losing 10% of $1 million (-$100,000) feels a hell of a lot worse than 30% of $1,000 (-$300).  I never really wrote about this idea because I didn’t understand it…until now.  Unlike a traditional drawdown that I can hold and (hopefully) recover from, I realized this 6% loss.  This is 6% that I will never get back.

I recognize how trivial a 6% loss sounds, but, I didn’t write this for your pity.  My portfolio and I will be fine.  I wrote this because it made me realize a flaw in my thinking.

On Of Dollars and Data I pride myself on being objective and data-driven, sometimes arrogantly so.  You can see it in a post like this one where I “prove” that it is better to invest a lump sum right away rather than averaging-in over time.  You can almost imagine me laughing at the “fools” sitting in cash.

But then, you put your own money on the line and it feels different.  You gain a sense of perspective that you didn’t have before.  You start to appreciate what a simulation and a backtest cannot express.  The safety of Monte Carlo fades and the 1s and 0s no longer provide shelter from the raw power of the market.  As Fred Schwed famously stated:

Like all of life’s rich emotional experiences, the full flavor of losing money cannot be conveyed by literature.

It’s in this world, the real world, where theory can only go so far.  Because if you are one of those unlucky souls who missed a 6% market rally, you don’t give a damn about the theory or the probabilities.  You just care about what happened and why it happened to you.

This is one of the most important and humbling lessons I have learned recently.  Some things you can teach with words and charts and some things you cannot.  Cold, hard facts and figures cannot substitute for direct experience.

The astronauts aboard Apollo 8 learned this the hard way during the first few seconds of their earthshaking launch (from Rocketmen):

The crew had trained for hundreds of hours for every kind of emergency, but NASA’s simulators were not the kind of dynamic, multiaxis machines that could come close to approximating such violence.

It is this reliance on direct experience that I have found increasingly useful over time.  It’s better than books, videos, or talking to others, because what works for someone else may not work for you.  So go out and experience the world for yourself.  Stop listening to the voices of others and see what yours has to say.  Because, as I so recently learned, there’s a difference between losing dollars and losing percentages.

Thank you for reading!

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This is post 133. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

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17 Responses

  1. Anonymous commented on Jul 16

    Ah, yes, real losses. You are quite right, words and figures do not convey the feeling in your stomach!

  2. Anonymous commented on Jul 16

    When I started trading in ’85 (when dinosaurs – well, guys from Brooklyn, etc., with street smarts and a gambler’s heart and soul – roamed Wall Street’s sell-side; the buy-side was always a bit more educated and elitist), the old-pros (seemed like they were in their 60s, but were in their 40s and 50s – just drank and smoked a lot and never exercised) had me trading from the first day on the desk with real money (very small positions) as they said you learn nothing from paper trading – you learn when your “brilliant” idea isn’t working and your P&L is all L. Those guys (and a few women) were insanely smart as I still think back on and use a lot of what they taught me in those “unsophisticated” days.

    And Nick, I had (and I bet many, many others have had) the same thing happen to me when I had to move an IRA to a different firm as the firm I worked at changed its “Investment Policy” and the new firm didn’t support the funds from the old firm – blah, blah, blah. Long story short, I lost out on a 3+% up move in the S&P in those ~ 2 weeks. It sucked, but my guess, I’ve had a few things tumble my way accidentally that I either forgot about (we remember pain longer than pleasure – except for one particularly comely blonde in college – story for another day) or attributed to my brilliance and not luck. To wit, maybe it all evens out over a lifetime.

  3. Anonymous commented on Jul 16

    You should have transferred the assets “in kind”. They could have transferred the whole shares with no loss of value and no need to sell and repurchase.

  4. Anonymous commented on Jul 16

    Terrific post that rings very true with me. For many, such experiences lead them to a lifetime of overly conservative investing. The real trick is to not overlearn the lesson that shit happens and be too afraid to take intelligent risks.

  5. Anonymous commented on Jul 16

    Very good idea assuming the new company supports the funds you have, which was the problem I had as per my earlier post.

    Note to Nick – I’m happy to post under my name, but don’t see a place to log-in or enter my name, etc.

    • Nick Maggiulli commented on Jul 16

      No problem. You can always leave your name in the comment.


  6. Anonymous commented on Jul 16

    Nick, I wonder if a part II of this story is in your future, even if just another mental exercise to gain valuable experience. You say the plan was “Sell assets at bank 1. Send the cash to bank 2. Buy new assets at bank 2. Voilà.” If say a very normal August/September slide brings the price of the market below your May 31 prices, what will you think then? You didn’t have to buy after the short-term run-up, that again was a choice (probably the correct choice IMO). Will you wonder why you didn’t wait? Food for thought for the next time. I’ve had a few of these broker change experiences too and I’m pretty sure I haven’t had my last for this lifetime. It’s tough–I know from experience as well.

    • Nick Maggiulli commented on Jul 16

      Good point. I didn’t wait, because, historically, waiting is sub-optimal most of the time. I have written other posts on this and the data confirms it.

  7. Anonymous commented on Jul 18

    I’d note that 15000 in 25 yrs isn’t 15000 in todays purchasing power. Hopefully makes you feel a little better

    • Nick Maggiulli commented on Jul 18

      My rate assumptions adjust for that (those are $15,000 real dollars), but thank you!