Crashing Investment

Hi. I invested €10k at the end of June with Irish Life in their Select fund (and received a €100 bonus for investing when I did). It's a 5 year term. However, withdrawals etc allowed with significant exit fees. My problem is, that although I understand investments can fall as well as rise, based on the advice from my financial advisor, I was fairly confident in its potential performance based on past performance (which I know is not a reliable guide to future performance). Since July, its value has dropped consistently. Including exit fees of €450, if I close it now, my investment is only worth €8560. The capital itself is only valued now at €9100 apx. So it has dropped by 10%. My inclination is to withdraw it now and cut my losses. My advisor assures me that it's not time to panic yet. But in my opinion, the global economic outlook is sufficiently bleak to lead me to believe that by the time it really is "time to panic", I'll have lost significantly more than €1600, with no-one to blame but myself. Can anyone advise me what they think I should do please? Withdraw it, and put it off my small enough mortgage, or leave it and hope for the best, or move it into something else?

Opinions would be really welcome.

Thanks for reading this
Mers

5 years is the absolute minimum timeframe money should be left in the stock market, precisely for the reasons given in your post - markets are subject to (sometimes quite extreme) short-term fluctuations. Over the medium-long term (7+ years) stock markets will normally beat every other asset class. Joe Soap always loses money because he buys in at the top and panic sells at the bottom. If you don't really need this money, my advice would be to ride it out for the 5 year term - who knows where the world economy will be in one month, let alone in 5 years? Why sell now, incur exit penalties and crystallise your losses?

This loss certainly isn't your own fault as you say. Quite a lot of people have been badly stung in the last six moths and most much worse than yourself.

The general advice is correct that you should leave the money in for the long term - at least 5 years and preferably 10 years.
I do suggest that you question Irish Life closely on the annual fees they are charging you on this fund and I don't just mean management fees. Don't be put off by confusing jargon - ask them directly how much in total did they take in the last year. If it's high - over 2% it might be better to cut your losses and cash your funds in

Great point, thank you. I'm getting particularly concerned in how much is potentially charged over the life of my PRSA. At retirement age of 65, the latest projection is that my prsa would be potentially worth €387K, but after charges €317k, a grand total of €70k in charges.... Is this the norm? And does anyone know whether you can simply choose to move your prsa to a different provider? Will they all have similar charges?

Same thing happened to me - my advise - stay with it. Invested 6K stg in 2 European Growth funds in 2000. Within 6 mths my investment was down 50%. It remained like that for 4 YEARS. Once I broke even I pulled it out and took a piece of the mortgage. Should have let it sit...my first dip into Investments..I remember it well...LOL

Mers said:

Great point, thank you. I'm getting particularly concerned in how much is potentially charged over the life of my PRSA. At retirement age of 65, the latest projection is that my prsa would be potentially worth €387K, but after charges €317k, a grand total of €70k in charges.... Is this the norm?

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See below.

And does anyone know whether you can simply choose to move your prsa to a different provider?

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Yes - that's one of the key selling points of PRSAs.

Will they all have similar charges?

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Charges vary. Standard PRSAs can charge a maximum of 1% annually and 5% on each contribution but you can get lower than that. For example:

The cheapest PRSA?

In relation to the original issue if you originally bought into an equity investment but are panicking after a few months then perhaps you bought or were sold an inappropriate product?

Thank God the SSIA's didn't end this March!

Why? You would probably still be up. For example I just looked at the 5 year graph for EuroStoxx 50 and even with the recent volatility it's well up on 5 years ago. Also a 5 year graph of ISEQ suggests that it's 75% up in the same period.

a 10% drop in one year is not that significant.
Stocks can deviate much more so than this.
I would pay little if any attention to the media in regard to investment decisions.
Hold for term........I assume this was your initial plan? so why deviate if after one year you are down 10%?

Thanks markowitzman
I've actually been browsing the site (brilliant)since this morning when I posted that, and have quickly realised that I've overreacted somewhat, being a first time investor, etc. My plan was indeed to hold for the term so i imagine that there is no point being a nervous nellie after just a couple of months. It has to be said though, that it's been a bit of a bad start and the ability to access the fund online is a curse as well as a blessing as it just encourages over analysis by myself. From looking at other threads I've also realised that i'm actually pretty fortunate thus far...

I agree with all posts.

No panic and keep it that way.

The only thing of my concern are these:
1. You should choose funds without entry/exit fees
2. You should choose passively managed indexed funds (they can be also bond funds and REIT's) with the minimal charges
3. You should have the proper portfolio of many funds to satisfy your risk appetite and time to invest

The problem is that cheapest passively managed indexed funds are 0.75%.
Even outside the pension you cannot buy cheaply ETF's that are similar to these funds.

All in all you should not choose funds that are with exit/entry charges and high management fees.
They should track some index (e.g. emerging market or US small value or whatever) passively.

In the US such charges are around 0.2% where you have even funds with 0.1% charges.
I hope one day that will happen to Ireland and these brokerage or pension provider charges will go down.

Hi to the last 3 who posted replies to my question. Thanks a lot. I think you're probably right. Btw, it is an absolute curse being able to access the results online. I've been trying my best not to look more than once a week or so. You can drive yourself demented! What's worse is I listen to Newstalk most days from apx 7am and the good old 7.25am slot on business and the markets does nothing to put a rosy glow on my morning!
I'm meeting with my financial advisor tomorrow, who's going to explain to me why I shouldn't pull out until the 5 year term is up. He keeps talking about "showing me something on the internet" which should apparently put my mind at ease. My question is, what is his vested interest in keeping me in? I mean, the fees are the fees. I'm pee'd off that he didn't patently explain to me in clear terms about the exit fees. It was only when I looked at the paperwork that I received "after" I'd signed on the dotted line that it mentioned them. Anyhoo, what does he gain by me staying, or more to the point, what does he lose?
Zoran, I am afraid that as a novice investor with practically no knowledge of the markets, I have no idea what you are explaining in your thread, but you sound exceptionally knowledgeable and I thank you for your advice. If there's any of it that you can put in any simpler terms for me before 2pm Monday, I'd find it useful, so that I'd be better armed for a discussion with my FA. Thanks to everyone who's posting on this. I'm finding it very helpful.

The problem is that cheapest passively managed indexed funds are 0.75%.
Even outside the pension you cannot buy cheaply ETF's that are similar to these funds.

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You can buy ETFs for a $10 commission with countless online brokers both in US and in Euroland (internaxx etc). Why would one buy a fund that is passive and give the fund manager 0.75% just to do the same thing as buy an ETF?

Mers said:

My question is, what is his vested interest in keeping me in? I mean, the fees are the fees. I'm pee'd off that he didn't patently explain to me in clear terms about the exit fees.

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He would probably suffer a clawback of any commission made if you exited the fund within a certain timeframe e.g. 2 yrs.

There's no point in worrying about cheaper funds etc. at this stage - your early exit penalties would probably more than wipe out any potential savings you could make by switching to a lower-cost fund. Just keep it in mind for future investments.

Regarding checking your account online constantly, I check my online investment accounts and pension fund once a year, no more - I keep a general eye on the markets, but I'm committed to investing regularly over a long period, so there's really no point in checking it every week - as you say, you'd drive yourself mad that way.

markowitzman said:

You can buy ETFs for a $10 commission with countless online brokers both in US and in Euroland (internaxx etc). Why would one buy a fund that is passive and give the fund manager 0.75% just to do the same thing as buy an ETF?

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I'm going to be a TROLL and say cash the investment and take the loss of €1100 at this stage. You can use the €1100 loss and convert it to a €220 carry over against any future capital gain tax situation [can be carried forward for a number of years].

If you had a car with a gear box problem, would you get it fixed immediately at a cost of €1000 or would you wait 2 to 3 years for the problem you know will exacerbate, at a cost of €3000 plus for a full replacement. This analogy IMO, is the crossroads you are presently at. That is in the first instance of exiting now and consolidating or waiting 2 years for your investment to reach the floor before returning to +ive growth. Let’s look at the outlook for 2008.

1. The UK and US governments are basically bankrupt. However bad the US is, the UK is in a worse predicament. For instance in Q4 2007 it has a £20bn current account deficit or 5.7% of GDP.

2. According to Goldman Sachs, America has now had its second month of 0% growth, or in other words has entered into recession. When America coughs all other markets get a cold.

3. Consumers are maxed out on credit. Look at Marks and Spencer’s trading statement on Wednesday leading to a 19% tumble in sales. If the UK's largest retailer, which also is the darling of the city, says things are going to be tough till mid 2009, then they certainly are going to be. Consumer credit is a worldwide problem. Mortgage equity withdrawal in the states accounted for 8% of expenditure and 5% in the UK - this has all but dried up. More retailers will issue profit warning and face tough conditions.

4. The last 10 years has never seen so much money printing. The ensuing inflation that many economies are experiencing is as a result of this, which is also coupled to higher commodity prices now only feeding through to RPI and CPI. Inflation is a disease and markets fear it, greatly. With flat to negative growth in the UK over the next 24 months the UK could experience a worse disease called deflation.

5. Only less than 10% of the credit crunch has come to market so far. What was seen initially as a local American housing problem has spread into all markets and is spreading quickly into other classes such as, credit card, mortgages, commercial and personal loans etc. In the States for instance the adjustable lending rate is still at 6.6% despite a 1% drop in the last 6 months. The markets say no to the central bank, same happening in London with the London inter bank rates [LIBOR] being stubbornly higher than central bank rates. As a result corporate deals are falling through left, right and centre and this greatly affects corporate ability to grow.

6. Finally in eight out of the last 10 years the movement in the first days trading foreshadowed the years move. The FTSE lost 2% during the week, The Euro Stoxx 3.2% and the Dow 4.2%, the worst start since the great depression. Even Morgan Stanley a vested interest, predicts the UK economy to slip 16%. Typically all markets will react the same way, apart from the Far East & Africa, as these are on a different dynamic.

The above list is not exhaustive, but is not good reading. Therefore I would cash out. Wait 18 to 24 months for the floor then buy in again at bargain basement values. The uplift on your €8900 will achieve profitability much faster. In the meantime consolidate and invest in a high interest 5% account, it will grow to €9441 net of tax after 18mths [You still retain €220 capital loss against any future gains above the 9.4k].

Anybody with a different version that is bullish please enlighten me, I stand to be corrected. For now though, encash and sit back and watch the [broken link removed].

Finally on two small points (i)Next time ETF rather than managed fund. You are paying over the odds for something that is easy to organise on line without as much commissions. (ii) If I thought the markets were just blipping, then I would agree just to ride it out like other posters suggestions but markets are reacting way more than this.

a good contrary opinion worth chucking into the mix, MichaelDes. Shows really what a subjective business investing really is doesn't it. I would quibble however about the gearbox analogy as your car won't spontaneously recover due to other unpredicted events..

kellyiom said:

a good contrary opinion worth chucking I would quibble however about the gearbox analogy as your car won't spontaneously recover due to other unpredicted events..

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Thanks Kellyoim. What about a small hole in the roof of a house? In time it will develop and cause further problems and costs. House unlike cars are typically long term appreciating assets? But I think you got the point I was trying to make.

markowitzman said:

You can buy ETFs for a $10 commission with countless online brokers both in US and in Euroland (internaxx etc). Why would one buy a fund that is passive and give the fund manager 0.75% just to do the same thing as buy an ETF?

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Thanks Markowitzman,

I am doing that in my tax managed account. I have a Schwab account for a long time and keeping the portfolio of passively managed Vanguard ETF's. The small problem with this is it is all $
Do not forget that ETF's are also with management fees, so my whole portfolio is with 0.2% fees that are inside ETF's.

Also it depends are funds or ETF's better based on ETF fees as some ETF's are also with even 1% fees.

But I have my pension invested the only feasible way in Ireland through the pension provider (as I am still small to have SSAP or some other way).
If I have more then 100k I will probably open an account with Vanguard Ireland as their fund fees are a joke to others.

I have no choice then to opt for 0.75% that is the cheapest.

Where your pension is and how much are your management fees?

Zoran said:

I am doing that in my tax managed account.

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Sorry - what is a "tax managed account"? I