Are your investments dying? It might be time to switch

EDINBURGH — The financial services industry routinely churns out warnings to investors to avoid switching investments. This is because you incur costs as you move in and out of funds and products. However, there are times when you need to make a change because the alternative is throwing good money after bad. Johannesburg-based investment advisor Dawn Ridler sets out some practical steps on how to clean up a portfolio. She compares the process to gardening, with pointers on what to consider as you rework your investment strategy. Chucking in some investments in favour of others can be easier said than done, with some dud products locking you in to maturity and a dismal final return. – Jackie Cameron

By Dawn Ridler*

If you’re a keen gardener and a bush or tree you have planted isn’t thriving, despite your careful consideration to the conditions it likes, you don’t just yank it out and stick it somewhere else in the hope it will bounce back. There are things you do first: You examine it, you research it, you treat it and as a last resort you move it…INVESTMENTS ARE JUST THE SAME.

Examine it, Analyse it. In order to examine anything, a diseased plant or a rogue investment, you have to know the basics of what you’re doing or get the advice from a horticulturist or investment specialist. Every investment you have, from savings pocket to retirement savings, must have an objective. What do you want the money for, and when do you want to use it? This simple input will dictate what platform to use, the asset allocation (the blend of cash, bonds, stocks and property), type of investment, whether it should be ‘wrapped’ in a life license, the tax implications and more besides. What are your expectations and are they realistic? Plants can’t be put anywhere – if they need full sun, they will not thrive in the shade. Equity investments need time to ride out economic cycles to really perform – you can’t day trade with them and expect the same results.

Research it. When we plant something we have certain expectations from it – to shade, to provide colour or scent, to be low maintenance, to produce a fruit or flowers for you to use/consume, to be green in winter or to block out nosey neighbours – in other words, objectives. Once you have determined the objective of the investment, do you know enough to manage it yourself? Historical performance is not an indicator of future performance there is more you need to know. Like what is the yield, what is the risk profile. This is a complicated field, but it is also not impossible to learn – if you have the time you can always do a CFP (R) or CFA.

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Treat it. Once you’ve identified what is wrong with a plant in your garden, you can treat it right where it is – even if you are going to do something temporarily until it is the right time to move it. There are right and wrong times to move a plant. Fruit and deciduous trees are best moved in winter or winter bulbs in summer. If you want to move a tree digging a moat around the tree and filling it with sawdust and leaving it for a few months is often the best solution. When it comes to investment it is also not a good idea to make a knee-jerk reaction. Can the investment be corrected right where it is? Do you need to alter the asset allocation or change the fund mix? What level of fees is being charged on the investment – can they be brought down? Does it have an ‘early termination penalty’ where leaving it where it is, with some gentle management, might be the most prudent course of action? If you’re paying a financial advisor fee and you don’t hear from them every year and get investment guidance, find one who will partner with you and help you up-skill on investment over time and not hit and run.

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Move it. Sometimes there is just no option but to move an investment. Make sure it is being moved for the right reason. If an advisor is suggesting a move, find out which investment platforms they are licensed to use. If their recommendation is only the one they are licensed to use, be cautious. If you suspect that fees are eroding the investment, ask for an ‘EAC’ (Effective Annual Cost) report. In this economic climate, you need to try and keep this under 2%. In my experience, some EAC on insurance platforms run as high as 5.5%. Putting that in context – if inflation is 5% and the EAC is 5.5% then the investment has to grow 10.5% before you even make one cent of ‘real’ returns. I am sticking my neck out here, but never pay ‘upfront’ fees for an investment.

Nurture it. Never abdicate the sole responsibility for an investment to an advisor, up-skill yourself on investing over time so that you understand the advice. Long-term investments need a light touch so they can reach their objective. Retirement funds should not be used as a piggy bank, build flexible investments for other objectives (saving for a home for example) and emergencies – apart from anything else the tax you have to pay is hideous when you withdraw.

Action: Never park and forget an investment, they should be checked at least once a year. Usually, all that is needed is a fund switch, but if you move it – do so for the right reasons.

• Dawn Ridler, founder of Kerenga Wealth Ecology. CFP® BSc Hons, MBA