Wednesday, July 2, 2008

Second thoughts on Equity Funds?

It has become increasingly prevalent, from observing the content of some personal finance discussion forums, that people are beginning to panic about their equity related funds.

Some of these individuals have re-invested their SSIA dosh and have continued to save a few bob every month. I would go so far as to say that they do understand the up/down nature of these funds but they are now full of doubt as to whether they made the right investment decision.

This uncertainty raises a few questions:-

1. If the investor understood that the value of their investment can fall as well as rise, why are they panicking at this early stage of what should be a medium to long term plan?
2. Why have these investors resorted to asking these questions on discussion forums?. Surely, their first port of call should be with the person who advised them on the product.
3. If the initial plan was to try and beat the returns available from deposit accounts and outrun inflation, why are they now considering switching their funds to cash?
4. I would assume that their advisor would have formulated an investment strategy, with the agreement of the client, by recommending funds that in line with the level of risk that the investor was willing to take. If this is the case, why are the funds now unpalatable for the client?

The advisory process is a two-way street. It is a hand holding exercises, where the consumer is guided through products that should match their risk appetite. It would be customary that clients would be advised on the merits of spreading their investments over different asset classes so that not all their eggs are in the one basket.

It could be that the consumer is suffering from one, or a combination of the following.

i) Their less risk averse friends can talk of nothing except the great deals that are currently available on deposit accounts which makes them feel foolish for taking a risk.
ii) Are they suffering from a short-term memory lapse? They should have seen the way that their SSIA funds performed badly in the early years and then finished with a flurry.
iii) A lack of understanding on the long-term nature of these investments and not being aware that, by investing more money now they are buying more units in the fund than they were 12 months ago.
iv) The advice was not suitable to the consumer initially and the investment strategy chosen was too risky.
v) High charges are accelerating the erosion in value of the investment.

You should give some serious thought as to what course of action you want to take in evaluating this dilemma.

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