How To do It: Avoid moving in and out of market

Most managed funds continue to perform badly and it is a sad reflection of these turbulent economic times that even slight losses are considered to be success stories.

Many experts will agree that diversification of one's investment portfolio will lessen the risk of losses being incurred. If the portfolio comprises assets in the various sectors, such as shares, property, cash and fixed interest, then when one sector performs badly, the other asset groups will prop up the overall performance.

Try this hypothesis - an $60,000 investment is evenly divided into three sectors - shares, fixed income and property trust. Assume that shares fall by 25 per cent in the year whilst the fixed income increases by 5 per cent and the property trust by 10 per cent.

After one year the portfolio will be worth $58,000 ($15,000 - shares, $21,000 - fixed interest and $22,000 - property) a fall of 3.33 per cent. Had all the money been invested in shares the loss would have been $15,000 - a reduction of 25 per cent.

The theorists will pontificate that the main advantage accrued from diversifying one's investment is that the chance of a negative return is significantly reduced. But then the unexpected happens and the good performance of one or two sectors will be outweighed by the dismal returns of the others.

Recent data from Australia has indicated that over the past year growth performance funds there have gone southwards. It appears that although property trusts have performed well, returning nearly 15 per cent, with cash and fixed interest in positive territory (at 4.7 per cent and 6.2 per cent respectively), the equity side has been a disaster indicating a fall of over 23 per cent.

Obviously, It depends on the composition of the portfolio whether profits (or losses) were made. If the chosen fund showed a bias towards equities, then that sector's abysmal performance will surely result in a portfolio loss. If the mix went towards property then there would be a good chance a profit would have resulted.

Some unfortunate Gulf-based investors with a managed fund - which could take the form of a company pension scheme - may have found that their fund manager had a predilection for equities. Little wonder that their portfolio is now causing them major concern.

The end result is an unhappy investor and no doubt a rich fund manager or investment adviser, having received their up front commissions and, in some cases, ongoing fees. The temptation would be to ditch the managed fund and move into the more conservative investment options.

If that had been the strategy two years ago then there would be no sleepless nights and today we all could enjoy a worry-free National Day.

The inevitability is that any fund will make losses at certain times and one or two years of poor performance have to be taken in the long-term context. Over the past thirty years, the equity market has shown declines only in six different years.

Do not rush and be panicked into changing your investment portfolio.

Assuming the fund is well managed, there is no reason to doubt that over the next decade, the losses of the past thirty months will be recouped and recent paper losses may be turned into real profit.

But this comes with a warning. There is a strong possibility that real equity returns for the next few years will average no more than 5 per cent - bad news for those who think that the 25 per cent annual returns of the late 1990s were just around the corner.

It is impossible for the average investor to pick the market correctly and the warning must be to avoid moving in and out of the equity market in order to avoid losing money.

However, if your fund has consistently under performed during recent times then this could be the time to look elsewhere. But if this is the way to go ensure that your move is to another fund of similar ilk.

Otherwise the risk is to move into a sector that has already peaked, and moving down, thus exacerbating the already perilous financial situation. And who said things could not get any worse?