What differentiates an investor from someone who chooses to spend all his disposable income? Available wealth aside, a willingness to plan for the future and an ability to take a long-term view are key factors.
Investing requires a cool head and careful consideration of the choices on offer. Periodically, investors need to review their financial plans and consider whether existing plans and investment choices continue to be appropriate.
Personal circumstances change, different investments perform better in different investment climates, new products come on to the market and so on. Each development or trend may have a bearing on the suitability of different investments for the individual.
It is important that investors take the time to think out their decisions. They do not want to act in haste but, equally, they do not want to stick their head in the sand and refuse to listen to, much less act on, changing market or personal conditions.
Investors should take the time to regularly re-examine their finances thoroughly and make an informed decision. Many can do this with the help of a financial adviser.
The adviser offers financial expertise and advice and has the added benefit of being emotionally detached from the decision. Without an adviser, emotion can sometimes cloud the investor's thinking.
Consider an investor with two with-profits bonds, one enforcing a market value reduction (bond A) and one not (bond B). The investor might feel a bit nervous about with-profits at the moment and this nervousness may lead him to conclude that he should get out of with-profits as soon as possible and, therefore, cash in bond B.
As he wants to avoid an MVR on bond A, he may decide to remain invested for the time being in the hope that the MVR will disappear over time. But does this logic follow?
The first question is why does he want to cash in either bond? Has the investor changed his attitude to risk? Has he been spooked by negative press commentary? Does the fund not offer good prospects for future growth? Or does the investor feel that a lack of MVR equals a win of some sort and he should take the money and run before the fund manager realises its mistake?
Getting to the crux of the issue is important because it would be a mistake for an investor to cash in a with-profits bond for all the wrong reasons and forfeit any possible future returns.
The second question concerns bond A. Does it make sense to remain invested in bond A? Remember, an MVR is applied the value of a bond and the value of the underlying assets are out of synch and the MVR acts to ensure that investors do not leave with more than their fair share of the fund. That would be unfair to investors remaining in the fund.
The bond value, net of MVR, generally represents what the underlying assets are currently worth. Understandably, this can be a bitter pill for the investor to swallow but it is a reality that needs to be faced. The MVR will continue until such times as the value of the underlying assets recovers in line with the value of the bond. The adviser has a key role to play in helping the investor understand how quickly this recovery is likely to happen, if at all, and consider what returns are potentially achievable elsewhere from other providers and/or investments.
The speed at which the MVR will disappear is largely determined by the financial strength of the fund, the expertise of the fund manager and, of course, the behaviour of the markets themselves.
Financially strong companies have more investment freedom than weak funds. They can invest a higher proportion of the fund in investments such as equities when they expect them to produce attractive returns.
Weaker funds, on the other hand, do not have as much investment freedom and have to limit the proportion of the fund they invest in higher-risk investments. Consequently, weaker funds are likely to offer lower rates of return over the longer term compared with stronger funds.
Investors need full information before taking any decisions and it is important that financial plans are made and reviewed with a cool head. Fortunately, many investors have professional advisers on hand to help them make the right decision based on sound logic rather than emotional reasons.