It is a well documented habit in behavioural finance that investors experience loss more intensely than they experience gains. When investors experience a negative return over the short term they may act to protect themselves from further losses by switching to another fund which has performed better over the short term or alternatively switching to cash, which just locks in any short term losses and excludes any future outperformance.
The first aspect to note is that a unit trust investment is a long term investment. When a fund manager has been selected owing to their investment philosophy and a proven long term track record the investor must commit to accepting the volatility of the fund as a function of the fund manager’s investment style and portfolio positioning. Attempting to move between funds that have performed well in the recent past can destroy value for investors, as an example we examine the graph below.
The two funds in question are Coronation Top 20(Red) and Investec Value(Grey) over the period 1 October 2000 to 7 December 2007. An investor in the Coronation Top 20 fund may have decided to switch to the Investec Value fund at the end of this period due to the outperformance they witnessed. Since 7 December 2007 up to 24 February 2014 the investor would have seen the following:
The outperformance has been reversed and the investor would have underperformed both funds over the period 1 October 2000 to 24 February 2014. Had the investor simply chosen one fund at the start and stuck with it the result would have been as follows:
They would have achieved essentially the same return from either fund over the long term had they simply stuck with the fund manager and the investment style they originally chose.
Conclusion
While the above is not implying that there are not valid reasons to switch from one investment fund to another it should be clear that switching for the wrong reasons can be counterproductive.
It is most advisable that you consult your financial advisor before making any changes to your portfolio.
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