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Don't bale out at the slightest dip

What are the real warning signs that an investment may go sour?

Friday 21 April 2000 00:00 BST
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Whether it's a share or a unit trust, a stockmarket investment takes time to grow. But giving it enough time is not always easy - you have to keep calm enough to view the day-to-day price fluctuations philosophically. If it's a long-term investment, say advisers, you should not jump out at the slightest dip in prices.But what are the real warning signs that an investment may go sour, and how often should you review your portfolio?

It depends whether you hold shares individually, or have stakes in collective investments such as unit trusts or investment trusts, advisers say. "With direct share investment you've got to be a very active investor," says Jason Hollands of discount brokers Best Investment. "Newsflow will have a dramatic effect on your portfolio."

But an investment fund is different, according to Mr Hollands. "The point with buying a fund is that you are contracting out the decision-making." Best Investment sends out reviews to its clients every quarter and Mr Hollands says scrutinising your portfolio more frequently than that is not a good idea. "We think there is a danger if you're looking at these things too closely you can end up not seeing the bigger picture," he says.

Take the technology sector. Thousands of small investors have bought into investment funds which hold shares in companies involved in the fast-growing internet, telecommunications and biotechnology industries. Following astonishing performance last year and this, many market players are now worried that recent weakness could herald more falls in shares prices to come.

So is now the time to sell collective technology investments and buy European equity funds instead? No, says Mark Dampier, head of research at brokers Hargreaves Lansdown. Hang on for the long-term. Assuming you had good reasons to invest in that sector, if you wait, it will pay off, he says.

"What you are aiming for is a fund that is above average for its sector," he says. "The sector may be going down the tubes (at any particular time), but eventually it will come good. No market has ever been down for 25 years," he says. All markets and industrial sectors follow economic cycles.

Those who have been invested in Japanese funds in the last 10 years know what it is like to watch your assets dwindling. From 1990 to 1998, £1,000 in the average Japanese unit trust withered to around £850. But investors who managed to hang on rather than sell at a loss were rewarded with the latest phase of phenomenal stock price growth. That same £1,000 investment would be worth £1,528 according to financial data provider Moneyfacts - representing an annual rate of return over the period of just under five per cent.

One sound reason for switching investment fund - within the same sector - is if the fund manager leaves. Often a fund's reputation is based solely on the proven skill of the individual picking out the stocks. Mr Hollands says a change in fund manager will have a major impact on the performance of most unit trusts, but this is not going to happen overnight, so it is no reason to monitor your trust on a daily or even weekly basis. But barring events such as the resignation of a fund manager or the discovery that the fund management group behind the investment is in huge problems, an investment could easily stay in place for 10 years, he says.

This is particularly true for investments which accumulate through regular savings, says Mr Dampier. If you are putting £50 or £100 a month into an equity ISA, for example, it takes about 12 years for the investment to become large enough to be worth moving.

Roddy Kohn of Bristol-based IFAs Kohn Cougar says you should review your investments at least once a year. And apart from checking on developments which could affect the fund itself, you should take a look at your original aims and objectives in taking that investment out in the first place.

He says: "Your circumstances could have changed. You may have made a lot of money in technology and want to consolidate those profits." While he agrees that you have to let time do its work, he cautions against sticking stubbornly with past decisions.

But selling a fund when performance has already seriously waned is often simply shutting the stable door after the horse has bolted. "The key thing is to pick up on things that might lead to problems," says Mr Hollands.

The trouble with chopping and changing investments, says Mr Dampier, is that you might make mistakes. Every investment decision involves the decision to sell and the decision to buy. There is a real risk that one of these moves will be wrong, he says.

"I would guess that if people had stuck to their original funds, they would have done better than they have," he says. So stick with your investments if you can, otherwise the only winner may be the broker who takes the commission.

Hargreaves Lansdown: 0117 988 9880

Kohn Cougar: 0117 946 6384 Best Investment: 020-7321 0100

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