By JLP | October 18, 2008
This morning I got a call from my friend. Our conversation went something like this (I’m pulling a 15 minute conversation from memory so bear with me):
Friend: I was looking at my 401(k) statement last night. One month ago I had $23,000. This month it’s down to $17,000. I lost $6,000. What should I do?
Me: Forget about it.
Friend: But if it keeps this up, I won’t have anything left.
Me: What do you mean?
Friend: If I keep losing $6,000 a month I’ll be out of money in three months.
Me: No. You have to look at it as percentages. You had $23,000, now you have $17,000 so you lost about 40% [I was estimating]. If you were to lose another 40%, you would be losing it off a smaller amount of money.
Friend: Oh, I see what you’re saying. How much farther down do you think it’s going to go?
Me: I don’t know but it’s possible your account could go down to $12,000 or so. I really don’t know. All I know is that we are closer to a bottom than we were before.
Friend: So what do you recommend I do?
Me: Keep doing what your doing and forget about your balance for now. It’s not going to do you any good to worry about it. I will say that cashing out now would be a mistake.
Friend: Okay, thanks.
I want to zero-in on something he said at the beginning of the conversation about losing $6,000 each month. That’s not how it works. The dollar-amount of the loss is based on the amount you have invested. If you have $100,000 in your 401(k) and it goes down 20%, you have lost $20,000. If you have $20,000 in your account and the market drops 20%, you have lost $4,000. See, the dollar amount isn’t a constant but the percentage is.
In other words, it’s highly unlikely your account would go to $0.00 as a result of a down market (unless you are using lots of leverage or you close out your account). I know it’s not exactly comforting but it’s better than nothing.