Losing value -vs- losing money. There is a difference.

Losing value -vs- losing money. There is a difference.

                         

If you haven't had your head in a hole lately, you've obviously seen the drops in the stock market and the real estate market. These two markets have a lot in common when it comes to gaining or losing value and money. Let's look at some simple math.

Looking at stocks first.Let's say you bought 10,000 shares of a stock at $10.00 a share. The value of your investment is $100,000. Now suppose that stock went up to $15.00. The value of your investment has increased but you haven't made any money. You don't make any money unless you sell. Selling at $15.00 a share, you will realize a gain of $50,000. That's real money. Now what if the stock dropped to $5.00 a share. The value of your investment has decreased but you haven't lost any money as long as you hold onto that investment. If you sell at $5.00, your investment value is only $50,000 and you realize a loss.

Now looking at real estate. Let's say you bought a house for $200,000. After a number of years, the value of the house has increased to $250,000. That's definitely a nice increase in value. You may be tempted to sell. If you were to sell the house at that point, you would realize a gain of $50,000.
On the other hand, if the market were to take a downturn and the value of the house dropped to $150,000, you would realize a loss of $50,000 if you were to sell at that point. You may want to delay selling at that level.

With either scenario, stocks or real estate, the ups and downs can make an investor nervous.. Historically, both markets have seen large swings both positive and negative. But over a longer period of time, both markets have seen more of an increase than a decrease. As an individual, you have to decide what your long term goal is. Do you have the time to ride out the market swings and hopefully come out on top?

With stocks, there are a lot of daily market changes that can influence the value. You should keep a close eye on your stocks and make changes as you feel they are needed but try to avoid knee jerk reactions to daily swings in the market that would cause you to lose money.

With real estate, you need to decide how long you plan on staying in your home. Short term living may not lead to a large increase in value. Buying a home should not be perceived as a way to make money but the chances of the value increasing will be better if you stay in the home for a longer period of time.