KEY POINTS:
A reader asks: "Are unit trusts a safe investment in today's climate? Our bank advised us to wait for the turnaround and not cut our losses as the bounce will happen. At our ages (69 and 64) any risk is a worry and the value of our investments
has gone down by $15,000 in the past five weeks. Should we worry? The bank says no - perhaps I am just being a panic merchant?"
I think the current economic situation gives us all plenty to worry about.
Without knowing the type of unit trusts you are investing in and your asset allocation, I can only provide general guidance.
Managed funds are a vehicle to give you exposure to the main asset classes: shares, property and fixed-interest investments.
It is the asset class the unit trust invests in that will determine your investment performance more than anything else.
Unit trusts are only as safe as the underlying assets in which they invest.
I suspect you might have a high proportion of your investment capital in unit trusts which are based on equities (shares) - your problem is less that you are invested in unit trusts and more that you have a very high exposure to equities.
Normally, I would expect for people of your ages there should be an allocation of no more than 40 per cent to equities.
Have a look at what your asset allocation was meant to be. Take some advice to check this allocation is appropriate to your age and goals. When you know what it should be, compare it to what you have now.
It may be your allocation to shares is lower than it should be because markets have fallen. In this case you should rebalance it by buying more shares. I know this is scary - nevertheless, it is the right thing to do.
However, in your case, I think it more likely your allocation to equities is too great. If this is so, you could wait for the turnaround.
However, it could be a long wait (unlikely though it may sound, the sharemarket may spend a decade or more gyrating around the bottom before it has a long, sustained lift).
If you find your asset allocation is out of whack, you should move now to bring it properly into line by selling out of some equity unit trusts.
It is certain a turnaround will come, we just don't know when. To be safe, you should move to the proper asset allocation (once you know what it is). You need to have the right proportion of investment assets so you don't feel an uncomfortable and inappropriate level of volatility.
Each week best-selling financial author Martin Hawes shares his strategies to help you grow your wealth. You can email your personal finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz
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