A math lesson for your 401(k)

Despite the big gains in the stock market since March, many 401(k)s still look like 301(k)s.

Part of the reason, the Wall Street Journal writes today, comes from a principle of mathematics: When you suffer a very large loss, you need a gigantic gain to get back to where you started.

Money manager and newsletter editor Daniel Wiener calls this  “the tyranny of the mathematics of loss.”

If an investment declines 10%, it takes about an 11% gain to break even (assuming you don’t pump in additional dollars), WSJ says.

If the drop is 20%, you need a 25% gain to recover. A fall of one-third requires a rebound of 50%. And if your investment falls by half, “you need a double,” or a 100% return, Wiener, the New York-based editor of the Independent Adviser for Vanguard Investors, tells the WSJ.

The recovery percentages grow exponentially because you have so few dollars working for you after a big loss.

I never liked math. My 401(k), which was heavily invested in stocks, still has a good ways to go before it gets back to where it was. Although, now I can at least look at the statements.

How have you been faring? Any good strategies others can learn from?

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