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Financial Happenings Blog
Monday, April 27 2009

The more positive conditions being experienced in equity markets since the beginning of March is starting to shake investors into action. For those who hold investments, including superannuation, that they would prefer to get out of and switch to an alternative investment care needs to be taken that you understand the risks and costs involved with this decision.


Of the two concerns, monetary costs are the easiest to quantify and are made up of the brokerage costs to sell your current investments and then buy new investments.  If you are using managed funds these costs are known as the buy'sell spreads.  Depending on how you hold the investments, e.g. through superannuation or an administration service, there may be other administrative costs involved.  For instance, the asministration service we use for client super and pension portfolios charges a $20.50 fee for every once off sale and purchase of an investment.  These costs should be fairly clear and transparent.

Risks involved with switching

The risk involved with switching investments is not so simple to quantify.  The key risk here is out of market risk.  This is the risk that between the time you sell down one investment and purchase into an alternative investment, the market price increases in value and you therefore miss out on this increase.

Of course if markets fall in value then by being out of the market will work in your favour.

To put some numbers to this risk I have tracked the daily movements in the ASX200 since the index reached its low in early March.  A minimum amount of time between selling one investment and having the funds from that sale available for a new investments is approximately 3 days so this is why I have chosen a 3 day rolling periodalong with 5 and 10 day periods.  The table below sets out this data:

Rolling 3 days Rolling 5 days Rolling 10 days
9-Mar 0.29%
10-Mar 0.95%
11-Mar 1.88% 3.12%
12-Mar -0.27% 2.56%
13-Mar 3.39% 5.00% 6.24%
16-Mar 0.10% 3.22% 6.05%
17-Mar 3.09% 6.58% 8.19%
18-Mar -0.10% 3.09% 6.21%
19-Mar 0.98% 3.97% 7.46%
20-Mar -0.42% 0.46% 3.65% 9.89%
23-Mar 2.44% 3.00% 5.99% 12.04%
24-Mar 0.84% 2.86% 3.74% 11.93%
25-Mar 0.82% 4.10% 4.66% 10.87%
26-Mar 1.03% 2.69% 4.71% 12.17%
27-Mar 0.70% 2.55% 5.83% 9.48%
30-Mar -1.85% -0.12% 1.54% 7.53%
31-Mar -0.62% -1.77% 0.08% 3.82%
1-Apr -0.07% -2.54% -0.81% 3.85%
2-Apr 2.81% 2.12% 0.97% 5.68%
3-Apr 1.51% 4.25% 1.78% 7.61%
6-Apr 0.56% 4.88% 4.19% 5.73%
7-Apr -1.34% 0.73% 3.47% 3.55%
8-Apr -2.34% -3.12% 1.20% 0.39%
9-Apr 1.44% -2.24% -0.17% 0.80%
14-Apr 2.22% 1.32% 0.54% 2.32%
15-Apr -0.14% 3.52% -0.16% 4.03%
16-Apr 0.75% 2.83% 1.93% 5.40%
17-Apr 0.03% 0.64% 4.30% 5.50%
20-Apr -0.20% 0.58% 2.66% 2.49%
21-Apr -2.43% -2.60% -1.99% -1.45%
22-Apr -0.25% -2.88% -2.10% -2.26%
23-Apr 2.04% -0.64% -0.81% 1.12%
24-Apr -0.82% 0.97% -1.66% 2.64%
27-Apr 0.52% 1.74% -0.94% 1.72%
Max 6.58% 8.19% 12.17%
Min -3.12% -2.10% -2.26%
Av 0.52% 1.59% 2.56% 5.07%

What the table tells us is that if you were out of the market for the best 3 day period you would have missed out on a 6.58% upswing, the best 5 day period a 8.19% upswing, 10 day period a 12.17% upswing.

How to minimise Out of Market Risk?

The best way to minimise out of market risk is to have enough cash set aside so that on the same day as selling out of one investment you can be immediately buying into another investment and therefore not be out of the market.

If you don't have enough cash to achieve this but you have some cash, the next step would be sell down your investment in tranches bit at a time.  This increases your costs of making the switch but these costs might be minimal compared to the potential out or market risk.

Finally, if you don't have any cash available it might be that you spread out the switch to spread out the out orf market risk over a period of time and thius hopefully reducing the risk that you will pick the worst possible time to be out of the market.

Your strategy will really depend on the purpose for making the switch including the benefits you expect to achieve from making the switch.

The bottom line is thet any investor should take special care in transitioning from one investment to another at any time.  The recent data suggests that this is especially the case at present.

Scott Keefer

Posted by: AT 02:00 am   |  Permalink   |  Email
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