Four good reasons (and one bad) to quit

By MARY HOLM

Q. In a recent column, you recommend that the correspondent get out of his high-fee investment.

Presumably this will mean selling that investment, which you usually don't recommend doing when investments are losing money.

A. I can see how you could be confused.

Just as there are 50 ways to leave your lover, I reckon there are five ways, or perhaps five reasons, to leave your investment.

It's really important to understand which of the following applies:

* You need the money. That's straightforward.

* The investment has ended.

I'm not just talking about term deposits, bonds or similar investments that reach maturity.

Sometimes managed funds or other investments are wound up, perhaps because of lack of interest in them.

* You've learnt more about the investment, and decided it isn't a good one.

That was the case with the correspondent. It would have been better if he had realised beforehand that the fees on the managed fund were too high.

But once he did find out, he shouldn't stick with the bad product forever.

The important point here is that - assuming the managed fund was a suitable product for him in the first place - he should move his money into another fund that invests in similar types of assets but charges lower fees.

That way, he's not abandoning those asset types when prices are low.

* The investment is basically good, but it has been performing badly lately.

That's the situation I'm referring to when I say don't bail out of investments that are losing value.

Many people want to. But it is not a good reason to sell. Read on.

* You are making an asset reallocation.

When you make a savings plan, you should start by working out what's the right mix of shares and/or share funds, property, fixed interest investments and so on.

It will depend on when you expect to use your money, what you already own, and your risk tolerance.

You might, for instance, go with 50 per cent in share funds, 40 per cent fixed interest and 10 per cent property (excluding your home).

The trouble is that over time, market moves will change those proportions.

Recently, for instance, many share funds have performed poorly. They might now make up only 40 per cent of your portfolio.

When things get out of whack like that, you should sell some of your other investments and put more into share funds, bringing them back up to around 50 per cent.

This often seems counter-intuitive. Many people don't like buying more of an investment that isn't doing well. They're more inclined to sell.

But, in the long term, it usually proves to be a great strategy. You end up buying while that type of asset is cheap.

You should also do asset reallocation if your needs change.

Around retirement time, for instance, you might want to shift more into fixed interest and less into shares - which leads nicely into the next question.


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