7 April 2021
This process can involve moving money between mutual funds of different strategies, changing to different share classes, or reallocating a portfolio. It can sometimes make sense to take up this option when needs or circumstances change, but we should always take a measured approach when considering switching.
It can be tempting to switch between funds in an attempt to improve your returns. Some investors switch to try and time the ups and downs of each fund's performance. However, timing the market is extremely difficult to do successfully due to the unpredictable nature of the short-term movement. Research has shown that, more often than not, switching destroys value.
Switching when an investment has lost value can be the worst time to trade as you land up locking in your losses. Another reason to avoid switching between funds is that selling units may trigger capital gains tax. In addition, the fund you change into may charge initial fees. These short-term costs may seem acceptable for an investor wanting to get into a new fund, but these costs add up quickly, and frequent switching can cause a significant drag on long-term returns.
When a fund is going through a relatively poor performance period, it is easy to fall into a “the grass is greener on the other side” mentality. But we must think with our head and not our heart. Selling a unit trust that has performed poorly over a short period is often an emotional response, and emotional switching invariably destroys returns.
So, when is a good time to switch?
The commonly accepted time to switch is after you have done your research. All funds go through good and bad periods of performance. The more good periods there are, the better the fund; switching out of one of these during a bad period is usually a bad idea as you miss out on the improved period that follows. On the other hand, if you feel that a fund is continually underperforming, then not switching could be a bad idea. The only natural way to know is to do your research (consult with your adviser) and not worry about trying to time the markets.
Look at your fund's performance in the context of its objectives. If you are invested in a high-growth fund that is expecting volatility, then some loss of value should not be of concern. But if the fund’s performance is misaligned with its objectives and lagging when benchmarked to similar funds, it is worth looking into possible reasons for the poor performance.
If you have done your due diligence and want to discuss switching, let us help you – let’s get in touch.