Thinking in Percentage

“Man, I have just lost $10,000”, Alberto was grieving to his friends that he has lost money in the recent stock market turmoil. Not to be left out, Roberto started to tell his sad story, “You know what, that $10,000 is nothing. I have just lost $100,000”. All their friends felt sorry for Roberto. Now the question is who has lost the most.

“What silly question is that? Isn’t it’s obvious that Roberto lost the most”, as usual some readers would be pondering. What if I say, you could be wrong. The answer is it depends on the situation. To evaluate who made the most lost; we have to look at the percentage of loss, not the amount. That’s right, whenever it comes to investment, gain or lost must be calculated in percentage. Or else, there is no way to evaluate how good or bad your investment or business really is.

Now let’s see whether Alberto or Roberto made the biggest loss.

Alberto made an investment of $20,000, and loss $10,000. So,
Percentage of loss = Amount of loss/Amount of initial X 100
= $10,000/$20,000 X 100
= 50%

Roberto made an investment of $1,000,000, and lost $100,000. So,
Percentage of loss = $100,000/$1,000,000 X100
= 10%

From the percentage we could see that, Alberto made the biggest lost from his investment. Roberto just made a loss of 10%. Even thou, Roberto’s amount look big, but the percentage is quite small. By right he shouldn’t be worried at all.

But the truth, the general public would always look at the figure and always make their decision based on it. They would get worried when they see some big amount losses even thou percentage wise it’s very small. Same goes with small amount of losses won’t make people get worried, even thou percentage wise it’s big. One very good example is lottery. Those who buy lottery never realize that every time they didn’t win the draw, their loss is actually 100%. By not thinking in percentage, they are actually losing a lot and will keep on wondering where they went wrong.

Another thing to notice about losses is if you lose 50%, to break-even you need to make 100% gains. That’s a long way to break-even. So, when it comes to investment, you must always have a stop loss system to cut your losses. You must set yourself maximum losses you are willing to accept and set it in percentage.

“As a successful investor, one must always think in term of percentage to maximize their investment.”

Let’s look at money management side, and the importance of thinking in percentage.

Let’s say you have personal loan of $20,000 and a mortgage of $200,000 with both terms is 10 years. You have extra $1,000. The personal loan total interest for this year is $2,000 and for mortgage is $15,000. Many would be paying the $1,000 to their mortgage because the total interest amount looks big. By right one should be paying off the personal loan because the interest rate is $10%, while the mortgage’s is just 7.5% (Note: Simple interest rate method was used for easier understanding). By paying the personal loan, you would have saved additional $75 in interest.

Here’s another scenario.

Arulin is a disciplined saver. Every month he would never miss to save a portion of his salary. Now he has a fixed deposit of $7,000 which is giving a return of 5% p.a. Arulin is saving them for his retirement which is 20 years from now. He also has a credit card debt of $5,000 at 18% p.a interest. He never misses to pay at least the minimum amount of his credit card bill. Is he doing the right move?

The right move should be to settle his credit card debt as the interest rate is way much higher than his returns. 18% of debt interest versus 5% of saving interest. Overall he would be losing more money, rather than gaining. He is only delaying his goal to retire earlier.

Does that mean no matter what we must settle the credit card debt first? It depends. If you have found an investment which gives stable higher returns than your credit card interest rate, then its okay pay the minimum amount for your credit card and continue to invest. It also depends on your cash flow health, which we will look at my up coming posts.

“As an aspiring millionaire to be, one must always think in percentage to maximize their money management, as you will see the example below.”

Why people aren’t making a decision based on percentage? The problem, we have been raised since kid, that the more money we, the better. This is true, but is not applicable when it comes to investment gain/loss and money management. People tend to get confused and make a bad decision most of the time.

All and all, when you make an investment and/or money management decisions, make sure that you think in percentage to maximize your overall returns.