As we all know, there are some things that just look better – or worse – on paper. One analogy that holds true for many sports fans is how a starting lineup looks before a season starts. “We’re looking good, playoffs here we come!” only for the team to start the season 0-5 leaving fans and management confused as to what their true potential is.
This analogy can also be used in explaining investments and the markets. In the world of investing, we have the concept of “paper losses” vs “actual losses”. Often times investors will actively watch the market and evaluate how their money is doing on any given day. If the market has a particularly volatile day, some investors will check to see how much money they have “gained” or “lost.” What they need to remember is these perceived gains or losses are merely on paper. Fluctuations in value are never realized until the investment is sold and the position is closed. All investments come with a degree of risk and as a result volatility is to be expected – while a paper loss can be disheartening, it is certainly not grounds for rushing to the exit. This difference between a paper loss and an actual loss is important. Remember: time IN the market is much more important than TIMING the market.
This article, although written a few years ago and with an American slant, helps explain the point in greater depth if you’re interested in reading further.