Most of my student's parents were sold a bill of goods from their financial advisors who were either ignorant or stupid. I will give them the benefit of the doubt and call them ignorant. After suffering losses of 80% on a stock market investment in 2008, they were told not to sell because their stocks will eventually come back. Everyone with massive losses dreams that their investments will someday come back. Let's fantasize that the same stock which declined by 80% in 2008 increases in value by 100% in 2009. You would then be ahead 20% right? Wrong!!!! Never ever add or subtract percent increases or decreases on the SAT or in life.
The correct way to deal with the above compound percent problem is as follows:
1. Assign a theoretical value for our stock--I like to use $100 when dealing with percent.
2. At the end of 2008 our stock is now worth $20 (an 80% decline)
3. At the end of 2009 our stock is now worth $40 (a 100% increase)
Therefore our two year return is minus 60% not a gain of 20%---So the Rule here is when dealing with compound percent problems start with 100 and work your way up or down step by step. For additional practice try p. 491 problem #13 from the Official SAT Study Guide.
