As one of my myriad professions, I work as an SAT tutor. As such, I’m tuned in to the specific tricks that the testmaker, Education Testing Services (ETS) is trying to catch you in. Right now, it feels like ETS is running the stock market. Try this question:

A sweater in a department store is marked up in price by 20% on Monday. The sweater doesn’t sell, and on Friday it is marked down 50%. Relative to the original price, what is the total discount offered on the sweater on Friday?

A) 20%
B) 30%
C) 40%
D) 50%
E) 60%

Answer after the jump.

How many of you said (B)? The answer is (C), but if you picked (B) or even if you wanted to pick (B), you’re probably suffering from the same confusion relative to your 401k or IRA account balance as the rest of us.

In this economy, if you guys are anything like me, you’re checking your portfolio only when the market is heading up. Maybe you keep a portfolio on sites like Marketwatch or your online brokerage. Maybe you checked once in a while when the market started to tank. Also if you’re anything like me, you probably are staring at numbers like “-50%” under “Performance.” Here’s the thing, though: if the market somehow goes back up 50% from where it is now, you’re still going to be 25% in the hole.

This is not brain surgery, I realize, but it’s also an incredibly common mathematical mistake. Percentages are relative to the starting number, which means if you lose 50% of $10,000 (to $5,000), and then regain 50% from $5,000, you’re only getting $2,500 up. Just like how the sweater was marked up 20% to 120% of the original price, then marked down 50% from that price to a total of 60% of the original price. Many people forget to reset the original value and say that 100+20-50=70, or down 30%. That’s the scary thing with this market. For people to regain their 50% losses, the market needs to go up 100% from its low point. 50% might seems reasonable, but 100%? That sounds impossible. Or at least like it’s going to take a really, really long time.