Percentage Changes

Glastoun

If you have a £100 investment that increases by 10% (£100 * 1.1 = £110), but then decreases by 10% the next day (£110 * 0.9 = £99) you’ve lost a pound.

But if you change the order, so the investment first decreases by 10% (£100 * 0.9 = £90), and then increases by 10% the next day (£90 * 1.1 = £99) you’ve still lost a pound.

Where do all these pounds go, and can something not be done about it? Or is it misleading to think of investments in terms of percentage changes, rather than absolute value?

Jegersmart

errrrr......it is not misleading to think of changes in percentage terms as long as one understand what a "percentage" is....?

http://en.wikipedia.org/wiki/Percentage

There are no "lost pounds" - and thus they do not go anywhere.....

J

gozomark

x*1.1*0.9 = 0.99x

Glastoun

The 'lost pounds' thing was tongue in cheek, and we did cover percentages at A Level, but how many people would see their fund drop 10% one day, and then rise by 10% the next day and think 'phew, I'm back where I started' when in fact they're not?

Just surprised me that whichever way the percentage change happened, the investor would always lose out.

Stompa

Glastoun wrote: »

The 'lost pounds' thing was tongue in cheek, and we did cover percentages at A Level, but how many people would see their fund drop 10% one day, and then rise by 10% the next day and think 'phew, I'm back where I started' when in fact they're not?

Just surprised me that whichever way the percentage change happened, the investor would always lose out.

I hope that wasn't A-Level maths!

gozomark

Glastoun wrote: »

Just surprised me that whichever way the percentage change happened, the investor would always lose out.

Its the tax payable to the fairies at the bottom of your garden

nomunnofun

Glastoun wrote: »

The 'lost pounds' thing was tongue in cheek, and we did cover percentages at A Level, but how many people would see their fund drop 10% one day, and then rise by 10% the next day and think 'phew, I'm back where I started' when in fact they're not?

Just surprised me that whichever way the percentage change happened, the investor would always lose out.

Surely it would be something to do with the fact that, on the second occasion, it would be increasing by 10% of the 90% which remains?

Now if you were to say that your holding went down by 10% of, say, £1000 initial balance, resulting in £900, and then it rose by 10% of your initial balance (an increase of £100), then all be fine. You are not saying this though and your assumptions, therefore, make no sense.

Glastoun

I understand this 25% more now than I did before I understood it 25% less, thanks for the help.

jimjames

Glastoun wrote: »

I understand this 25% more now than I did before I understood it 25% less, thanks for the help.

It is a good point although not so easily made with 10%.

Look at it with a 50% drop in your investment. It then needs a 100% increase or doubling in order to regain your original investment.

cloud_dog

Glastoun wrote: »

If you have a £100 investment that increases by 10% (£100 * 1.1 = £110), but then decreases by 10% the next day (£110 * 0.9 = £99) you’ve lost a pound.

But if you change the order, so the investment first decreases by 10% (£100 * 0.9 = £90), and then increases by 10% the next day (£90 * 1.1 = £99) you’ve still lost a pound.

Where do all these pounds go, and can something not be done about it? Or is it misleading to think of investments in terms of percentage changes, rather than absolute value?

With percentages (in your example) you have moved the goal posts so they original value (prior to the increase) has no relevance to the second calculation (reducing by 10%).

Each action is based on the current value not its previous value. I know as a human we like to relate things back but the two calculations are not apples with apples.

If you were to do this the second calculation (drop) would be an 11% drop in relation to your original value; it needs to be like for like.

People are always making percentage errors when calculating profit etc.

Sceptic001

In a similar vein, when your savings rate falls from 2.5% to 0.5%, your bank would call that a 2% cut, whereas your loss of interest is actually 80%.

Lies, damned lies, and statistics