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Doctcom Bubble Trouble

Students need to hear stories about the bursting of the dotcom bubble, when investors such as myself "froze like deer caught in oncoming headlights." Many people did not react until their portfolios had declined by significant amounts (all lost along with thoughts of early retirement).

If your stock portfolio dropped by the following percentage amounts, find the percent rise needed to rebuild your portfolio to a breakeven position?

  • 10%
  • 20%
  • 30%
  • 40%
  • 50%
  • 60%
  • 70%
  • 80%
  • 90%
  • 99%
Also, if your portfolio originally decreased by 50% in the dotcom demise, how long will it take for your portfolio to reach the break even point if the remaining amount is invested in the money market with a fixed rate of 3% each year (annual basis)?

 


Hint: Take an educated guess. If you don't have an educated guess, make a wild guess and educate it through trial and adjustment.

 


Solution Commentary: The percentage rise needed for a breakeven position are:

  • Loss of 10%...11% rise
  • Loss of 20%...25% rise
  • Loss of 30%...43% rise
  • Loss of 40%...67% rise
  • Loss of 50%...100% rise
  • Loss of 60%...150% rise
  • Loss of 70%...233% rise
  • Loss of 80%...400% rise
  • Loss of 90%...900% rise
  • Loss of 99%...9900% rise
Did you see a neat pattern...if not, work the problem using common fraction notation rather than percentages.

Finally, if your portfolio originally decreased by 50%, it will take more than 23 years for your "money-marketized" portfolio to reach the break even point. Think: (1.03)n = 2.