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Temperament, not intellect

“The most important quality for an investor is temperament, not intellect.” — Warren Buffett

It’s easy to fall into the trap of thinking that clever people make the most money when investing. But more often than not, it’s emotions influencing trading activity, not intellect. Investors traded ten times more in the first quarter of 2020 than in 2009.

Fear can drive us to switch, and switching isn’t always the answer.

Switching happens when we transfer money from one investment to another. This process can involve moving money between mutual funds of different strategies, changing to different share classes, or reallocating a portfolio. It can make sense when needs or circumstances change, but we should always take a measured approach when considering switching.

“the grass is greener on the other side” mentality

When temperament is more important than intellect

It can be tempting to switch between funds to improve your returns. Some investors trade to try and time the ups and downs of each fund’s performance. However, timing the market is extremely difficult due to the unpredictable nature of the short-term movement. Research has shown that, more often than not, switching too often destroys value.

Switching when an investment has lost value can be the worst trade time as you lock in your losses. Selling units may also trigger capital gains tax, and the fund you change into may charge initial fees. These short-term costs may seem acceptable for an investor wanting to enter a new fund with long-term prospects, but these costs add up quickly, and frequent switching can cause a significant drag on long-term returns.

When a fund goes through a relatively poor performance period, it is easy to fall into a “the grass is greener on the other side” mentality.

This is when temperament is more important than intellect. Selling a unit trust that has performed poorly over a short period is often an emotional response, and emotional switching invariably destroys our wealth.

The commonly accepted time to switch is after you have done your research! All funds go through periods of 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.

possible reasons for the poor performance

Look at your fund's performance

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!

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