Historical performance of unit trusts should not be the determining factor on which you base your investment decisions. Today, money flowing into the unit trust and investment services industry goes to a wide range of unit trusts and investment managers – this suggests that investment portfolios are more diversified than ever before; yet, there seems to be a parallel between investment performance and money flows.
When there is a performance dip, investors tend to switch or withdraw their investment – this behaviour can have a detrimental effect on investors’ financial goals. Therefore, independent financial advisors should be educating their clients on how certain behaviour negatively affects their wealth.
Fluctuations in investment performance are normal and have a varying degree of impact depending on the chosen investment e.g. equity funds (higher risk) vs. balanced funds (lower risk).
Investors who attempt to time the market can find themselves buying high and selling low, which means that their returns are, more often than not, less than the longer term unit trusts in which they could have invested.
Erratic behaviour can cause investors to miss out on a significant percentage of potential returns on an annual basis. In the long-term, this can damage value because the investment is also not reaping the full benefits of compound interest. In truth, it could take years to make up the difference in returns. It’s a much better idea to keep a level head and ride out performance cycles. By doing this, it’s likely you will reap the benefits.
Investors who disinvest during a dip and then reinvest when performance improves, aren’t able to benefit from the upward trend because the unit trust is already doing well; they’ve waited too long. This is where patience and making rational decisions based on relevant information are important.
When emotions override rational thinking, it can lead to impulsive decision making, usually at the wrong time. If you are feeling uncertain about your investment, it’s best to chat to a financial advisor. He/she can help you make rational choices – based on applying relevant information – rather than emotional ones. This will help diminish doubt and avoid making errors in judgment such as switching between investments based on panic. Essentially, he/she can serve as a voice of reason.
In order for investors to not miss out on returns, the clever approach is to find a reputable investment manager and stay with them for the long term. Advisors should convince their clients to do the same. By doing this, investors stand a better chance at getting the best value out of their unit trust investments.
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