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Copyright 2003-2004


WHEN TOO MUCH FLEXIBILITY CAN BACKFIRE
(My Wealth Feb 2001)

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As local investors of the third millennium we have a lot more flexibility than we had 20 years ago. We have over 300 local unit trusts, 300 Wrap Funds and thousands of Offshore unit trusts to choose from. We have instant access to portfolio valuations and a wealth of other information 24 hours a day over the internet. We are at liberty to switch between funds at very low costs and withdraw funds without penalty whenever we choose. All of this flexibility is a far cry from the endowment policy of the past, where we often only received valuations every 6 months and switching between portfolios or withdrawing funds before the maturity date was a no-no. One would assume that, with all this improved transparency and liquidity, the modern investor is much better off than his 1970’s counterpart. Not always so!

Unfortunately, in practice, all the flexibility we are now faced with could well be the undoing of our investment success. In the past, recurring premium investments would sit, locked up, in a bottom draw somewhere, largely forgotten about other than once every 12 months or so when they were dusted off for an annual review. Sure, we’d complain about the assurance companies performance, and the salesman costs but these complaints have certainly not disappeared with the “new generation” investments. Despite our complaints, at the end of 5 or 10 years, we would collect a good solid lump sum.

Recent experiences indicate that many of the new generation investors will not be collecting substantial lump sums at the end of their investment terms. The reasons are simple: increased liquidity lends itself to dipping into one’s investments from time to time; and increased information and flexibility encourages us to succumb to our human natures and get greedy when the market is high and panic when the market is low. The temptation to switch and chase last quarter’s winners is borne out by the outrageously high “churn” figures supplied by the unit trust industry. Statistics confirm that industry sales are highest when the market peaks, and lowest when the market is at its low point. Shouldn’t it be the other way around?

Transparency, liquidity and flexibility may be the corner-stones of a good investment but the bottom line is that the investor that considers an investment carefully in the beginning and then “locks it up in the bottom draw” and forgets about it might well stand to collect more in the long run.comment