15 December 2011

How to Recover from a Poor Investment Experience

Many people have not had a good experience with their investments in recent years. Here's one reason.

The investment industry tends to focus on "relative performance" - if your investment fund has done better than average then they are happy, even if that means a 10% fall in value.

Now, if you consider yourself to be an investor, that's fine; you are aware of the underlying reasons for investment performance, and are willing to ride out the difficult times for the prospect of bigger returns over the longer period. But for many real investors who simply want to see a growth in their savings above what they might get in the bank, that is just not satisfactory. Good relative performance doesn't pay the bills!

But there's no doubt that the higher the level of certainty in an investment, the higher the cost, one way or another. So here's some possible antidotes to poor performance, including what the cost is:

"Absolute Return" funds
Rather than relative performance these are funds which aim for an absolute return using various strategies - although that's not guaranteed.
Cost: long term performance is unlikely to be as good as more traditional funds.

Structured Products
Products which offer a pre-determined return but with conditions (e.g. performance of the FTSE 100).
Cost: There's still a chance the condition won't be met (although some are positioned to make this very unlikely), you generally need to hold the product for 5 or 6 years, and you are reliant on the credit-worthiness of the underlying provider of the return - normally a bank.

"With Profits" Funds
The subject of much heated discussion, these are multi-asset funds provided by insurance companies. Performance is, to some extent, insulated from day to day market movements, and if chosen carefully, a good fund will provide slow but steady growth. [Either you let the market choose the performance, or an insurance company!]
Cost: Long term performance will be worse than more direct investments; the return you get is decided by the insurance company; some companies' funds have performed badly for some time.

Products with Guarantees
Typically an insurance bond provided by an insurance company, these offer various levels of guarantee on your investment's performance.
Cost: You have to pay for the guarantee one way or another - either with higher product charges or by giving up some investment performance.

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