Investing can often feel like gambling. In the same way a gambler may switch games because they feel like they’re at a losing table or slot machine, an investor may feel like switching funds could secure them higher returns.
“Investing and gambling both involve risk and choice, specifically, the risk of capital with hopes of future profit. However, gambling is typically a short-lived activity, while investing can last a lifetime. Also, there is a negative expected return to gamblers, on average and over the long run.” (definition from Investopedia)
Gambling is also a system that is created so that the house always wins…
When you’ve worked hard for your money, you expect it to work hard for you too and don’t want to simply gamble it away. Hence, there are few things more anxiety-inducing than opening your statement one morning and your investments are worth less than they were a month ago. It can make you feel super-switchy when your best option may be to stay put.
Here are three reasons why switching funds could be a bad idea:
- You lose your momentum
We all know it, but we all forget it – the real benefit of investing is the wonder of compounding interest. Those who invest in mutual funds, for example, get rewarded every time the value of the units invested in go up, and so the more time in that fund, the more reward they’ll get. Changing funds renders all your years of compounding, whether they’re two or twenty, back to nothing as you’ll be starting over from scratch in a new system.
- It could cost you in more ways than one
Switching will most likely also cost you in fees and taxes. Most funds have sign-up or registration fees that you’ll have to pay all over again if you switch. Also, because it’s effectively the sale of an asset, this could mean capital gains tax.
- Bad timing
“Switching funds during poor performance inevitably destroys the value of your investment. This is because to switch, you have to sell your units, which often locks in the underperformance of the fund you are switching out of. At the same time, the fund you switch to may not be positioned to repeat its good performance in the future. In effect, by switching you are often selling and buying at exactly the wrong time.” (According to Mthobisi Mthimkhulu at Allan Gray)
All this being said, if the fund – or what you’re investing in – has run into major problems – it may be time to switch. Returns dropping by one per cent is a bitter pill to swallow but is often not a good reason for changing funds alone.
However, if your fund was quite overweight in a company that lost 95 per cent of value overnight as Steinhoff did several years ago, that’s another matter entirely. Are you investing in a mutual fund and the regulations have changed significantly, but your fund is still doing things the same way despite warnings from the regulator? That’s another good reason to think hard about switching.
Ultimately, investing is a marathon and not a sprint. Switching from one fund to another is a massive decision and shouldn’t be something an investor does more than once or twice in their life, if ever. Over many years, time spent at one fund will almost always beat picking the fund with the best returns this year.