Your questions answered by an industry expert
Can I still get a healthy return?
Q. Hi there and thanks for answering my question. I have a share portfolio with four different investment funds with a major bank. I have invested almost $500,000 about a year ago and have a recorded loss of $80,000. On top of that I have deposited another $50,000 a month ago in the same funds. I also contribute $1000 a month to my portfolio. My adviser has told me not to worry as I am in for the long-term - say 7-10 years. Do you think I am doing the right thing? Do you think I will have a healthy return in my time frame? I think I am being conservative and would be happy to double my money. Rob.
This was a great and complex question that was sent to me on my Money Makers program on Sky Business, but it so aptly captured many people's concerns. I couldn't answer it well enough on television so I decided to look at it closely here for my Yahoo readers too. Of course, Rob, these are general observations as I don't know your precise circumstances.
First, the funds you are in have lost $80,000 and many normal people would be aghast, but remember the stockmarket is down over 30%! On $500,000, you could be down $150,000 or more. This means the adviser has picked reasonably good funds. I would advise looking at these funds and make sure they are ones that suit your risk profile. Note your loss might have been reduced via distributions from the funds and these can soften the blow of bad market performances by the funds. Check that out so you know how the funds have performed.
The fact you keep depositing money indicates you are not frightened about the market and most long-term investors agree with your stance. A very small minority are preaching financial meltdown and we don't know what might happen if that happens. I think they are exaggerating, but I need to tell you that it is possible. The recent rescue packages and rate cuts are a good start, but more needs to be done. Given your losses, some advisers might have suspended your contributions until the market had effectively turned around and so these latter contributions tell me that you have accepted a fairly risky stance. A deposit for 7-8% might have been the more conservative position.
On the matter of you being a long-term investor, that is great and provided we don't become a victim of the worst economic outcome since the Great Depression, then your investments should come good and give a nice return. History says you have made the right decision, but history does not always repeat itself. Since 1978, the stockmarket has returned around 14% and that's despite a crash in 1987 of over 40%! There were recessions and corrections of the stockmarket and so shares do have a great history of staging comebacks after bad times.
I think its great to have a 7-10 year profile, but what about your doubling goal? If the market goes back to a 14% return over the next 10 years, then it would take about five and a half years to double your money. I use the Rule of 72 to work this out. Here you take the percentage return or interest rate and divide it into 72 to work out how long it takes to double your money. So even if your investment average is 8%, your money doubles in 9 years, but there will be tax. You'd need a 10% return to double your money and that's not beyond a good fund. But there is another slug - your adviser's fees! Make sure you are not paying much more than 1% - that's pretty typical but work out if you need to pay it. Also you have to add the adviser's fees to fund manager's fees. If the total loss to you is 2-3% then this will affect your return over time. Good luck with your investments.
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