What to do when your investment is losing money

Making Cents Financial Column

Imagine for a moment that two years ago you received a windfall and the amount was €184,000.

You invested it, but now the value stands at €172,000. Although the account had no explicit capital guarantee, you thought it was low risk and it was. But now you’re wondering what you should do to recover the €12,000?
Do you do nothing and stay invested and hope it will recover?
Do you move it to a higher risk account?
Do you close the account, take the loss, and put it into a current or deposit account?
What do you do?

Well I met a lady recently who didn’t have to imagine any of this because it’s exactly what was happening to her.
She inherited the money from her late mother’s estate. There was a property that was sold and the proceeds were divided between her and her sister, so that’s where the money originated from, and obviously the source had a lot of meaning to her.
And her feeling of panic was an understandable reaction and a familiar one to many investors. If things are going in the wrong direction, we feel the need to do something to protect our money, even though we know that we are in good investments.
Anyway, she reached out for help because she was panicked. Her big fear was that the balance would keep dropping.
Things had and were going in the wrong direction and she felt the need to do something to protect her money and her instinct was to close the account and put the funds into a Credit Union or an An Post account.

But before she was going to do anything she wanted to know if that was the right thing to do.
Before I tell you what we did, it’s important to point out that ups and downs are part and parcel of investing in the stock market. And you’ve got to be aware of this from the outset and if you don’t have the time or you don’t have the patience or you’re unlikely to remain calm when things go in the wrong direction, then I’d say stay away from these types of accounts, they’re not for you.

And I think this lady was one of those people.

The problem with closing her account was that she’d crystallise her loss, and the loss was only a paper one at this stage, it only became real when she closed the account. And unless you have a plan with what you’re going to do if you do close the account, it’s never a good thing to let your emotions take over and do something you might later regret. And that regret is that very often markets turn round very quickly. Take what happened when Covid hit for example.

From January 1, 2020 to March 31, a relatively cautious fund had reduced in value by -8.49%, but only two months later at the end of May it had made up that loss and two months later it was back in the black.

But no one knows when the market will turn, or what future returns will be, which is why it’s very difficult to know for sure how long it takes to recover losses.

But that’s not to say you shouldn’t try and that’s exactly what we did with this lady. You see we had a plan and I’m going to tell you what it was.

Whenever I’m in doubt about anything, I look at data and to the past to see what has happened and whilst past performance is not an indicator or a guarantee of future performance, it leaves some good clues that we should take notice of.

So we looked at the particular fund this lady was invested in and over the past five years it had delivered an annual return of 2.30% and when you deduct the management charge, the net gain was only 0.80% per year. If this pattern was to remain the same, it would take about 7.4 years before she would recoup the monies already lost.

And obviously if returns were greater than 2.3% she’d recover these monies faster but on the flip side if they were worse, it would take longer. The problem was that she had no certainty over how long the recovery would take and that didn’t sit well with her.

I wanted to take that uncertainty and stress away from her, so we came up with a solution that would guarantee the recovery of her money in just under three years.

And we achieved this by closing her account and moving it at its then value which was c. €171,816 to an institution offering a five year fixed account, that had at a guaranteed gross rate of 18.77% which after tax was 12.57%.

When we ran the numbers, we knew in year three of her investment her balance would be back at €184,000 and in year five the balance would be €193,413.

In order to match this return which was net 2.514%, her existing account would have to deliver a gross return of 5.14% per annum because when you deduct exit tax and the management fee from this number, you’d net down at 2.514%.
And was this account capable of delivering 5.14%?

Well since its launch back in 2014, it’s delivered an average return of 3% so going forward it would have to increase that return by 71% which seemed unlikely.

And remember it would have to increase it by that amount just to break even with a return that was guaranteed, which begged the question, why take the risk?
And this lady didn’t.

She moved out of an unguaranteed account into a guaranteed one and she’s now sleeping soundly knowing that in 5 years’ time she’ll have €193,613 in her account.

Now in total it’s going to take her seven years to bring that €184,000 to €193,613 because she had the money already invested for two years before she made the switch but she was much happier with this course of action, because having that certainty over what the account balance was going to be was all she wanted. In fact if she just got back the amount she originally invested, she’d be happy.

And then there are others who are different and let me tell you very quickly about someone who I thought should hold tough and not change his investment even though it had lost 13% of its value.

He had lodged €50,000 about 18 months ago and the value of his fund was now €43,400. He asked me was it time to hit the panic button? And my answer was no, I thought it was more like hit the patience button.

And that’s because markets in 2022 were particularly volatile with returns of -17% not uncommon for many investments and pension funds. This volatility was largely down to inflation and how the various central banks throughout the world were reacting to it.

The markets have somewhat recovered this year and this gentleman’s account was already +4.50% year to date.
And when I looked at how it had performed over the past five years, it’s returns were excellent i.e. 2022 -16.25%, 2021 +28.13%, 2020 +11.49%, 2019 +23.98% and 2018 -7.38%.

If he wanted to set a timeline of two years to recover these monies then you’d have to think that the chances were good based on these historical returns.

The average return on the account was 7.99% and this year’s performance was trending towards that number but even if the returns were 50% less i.e. 3.995% over the next three years, he would have the money back in 3.6 years’ time and if it did make those 7.99% average annual returns he’d have it back in two years and one month.

And because he had other monies, he didn’t need access to this particular account which is why he was happy to leave it in place. He didn’t lose sleep over the amount it had gone down by and was confident the account would return to its original value somewhere between two and three years. And he was also confident that over 10 years’ (that was the term he had in his head when he originally invested in that he would leave it for) the account would do very well for him.

Two different people and two different reactions to the same problem. He decided to leave his account where it was rather than moving to that fixed rate account I spoke about earlier because despite its excellent rate, he believed the return over the next five years in the account he was invested in, was going to be greater than the fixed rate return.

And that’s because the average return on this account over the past five years was three times higher than the fixed rate return was, whereas the five year average return for the lady I referred to was 2.5 times lower than the fixed rate, so you can see why one person would want to leave their account in place and why one would want to move there’s.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie