Percentages or currency? How portfolio decisions are influenced

The presentation of financial information in percentages or currencies can affect how investors make informed decisions about their portfolios. Here are some examples:

Context dependence: The meaning of a percentage or monetary value may vary depending on the context in which it is presented. For example, a pound figure may be more meaningful in some contexts than in others, depending on factors such as inflation and exchange rates.

• For example, a 10% increase in turnover of ￡100,000 is only ￡10,000, whereas a 10% increase from ￡1 million is ￡100,000. The same percentage change can have very different implications depending on the base amount.

Skewed perception: Percentages can sometimes create a skewed perception of the magnitude of changes in financial numbers.

• Suppose an investment portfolio has a 50% return over a given period. However, if the portfolio started with a small amount of capital, say ￡1,000, the actual return would only be ￡500. In this case, presenting the return as a percentage could create a skewed perception of the portfolio's performance.

Financial literacy: The choice between percentages and currencies may also depend on the audience's financial literacy and familiarity with the relevant concepts. In some cases, presenting information in a particular format may be more intuitive or easier to understand for a particular audience.

• For example, if you are considering investing ￡150,000, you may have to choose between Portfolio A with an annual return of ￡10,000 and Portfolio B with an annual return of 8%. This form of presentation can distort our perception and make us prefer Portfolio A because 10,000 is higher than 8, even though Portfolio B is better performing (￡12,000).

Comparability: When figures such as aggregate financial information for different periods or different portfolios are presented in different formats, it may be difficult to compare them accurately.

• For example, suppose two investment portfolios present their returns in different formats, one in currency (￡15,000) and the other in percentages (8%). In this case, it may be necessary to convert the return of one portfolio into the format used by the other portfolio to make an accurate comparison.

Perception of risk: The use of percentages or currencies can affect investors' perception of risk. Presenting portfolio returns in percentages may make losses appear more trivial than presenting them in currency terms.

• Let's assume that an investment portfolio of ￡250,000 generated a negative return of -5% last year. When losses are presented in percentage terms (-5%), the perception of a loss is lower than if losses are presented in currency terms (￡12,500). Presenting the return as a percentage could give the impression that the portfolio has not performed too badly.

Benchmarking: When assessing the performance of a portfolio, it is common to compare it to a benchmark. The choice of a benchmark can influence the presentation of portfolio returns in percentage or currency terms. If the benchmark is a stock market index, the presentation of returns in percentage terms may be appropriate. On the other hand, if the benchmark is a bond index, it may be more appropriate to present returns in terms of currency.

• Let's say an investor is comparing the performance of their portfolio to a stock market index, such as the S&P 500. If the investor presents the return of the portfolio in currency terms, it may be difficult to compare it to the index, which is usually presented in percentage terms. In this case, presenting the portfolio return as a percentage may be more appropriate to make a meaningful comparison with the benchmark.

Presenting information in percentages or currencies in portfolio presentation and selection can create a range of problems that impact on the accuracy of investor decisions and the effectiveness of communication. It is essential to choose the appropriate format to accurately communicate portfolio performance and risk without biasing or influencing clients' decisions.

See more on portfolio presentation here: https://www.dhirubhai.net/posts/arielcecchi_portfolio-choice-inconsistencies-in-investment-activity-7010576270686105601-BF6s

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