The recent negative performance of equity markets globally, and financial viability of several companies, has many investors concerned about their investments. At times of such market uncertainty and negative sentiment, people often think the worst. The following information is aimed to dispel some myths and provide clarity for investors.
*Is my money safe, I’ve heard some companies might go broke? *
While share investments have been hit and fallen in value, if you hold a diversified range of shares, such as in a managed fund, it’s extremely unlikely you will lose all of your investment.
How does a managed fund work?
A managed fund, or unit trust, pools your money with a number of other investors. These funds are used to purchase assets – for example, an Australian equity fund is predominantly shares listed on the Australian Stock Exchange.
So I’m not investing in the company offering the managed fund?
Most of the time, no. Your investment in respect to an Australian share fund, for example, is usually spread across a range of 20 – 60 different shares. This may include names like BHP, Westpac, Qantas and Woolworths.
I guess it’s unlikely I would lose all I’ve invested in an Australian share fund?
Yes, very unlikely. A fund may hold between 60 to 80 stocks and these would all need to go into bankruptcy. By spreading your investment across different companies you lessen the risk, a major benefit of a managed fund.
What if the company offering the managed fund goes broke or into liquidation?
This doesn’t mean your investment is lost. The fund assets (eg shares) are held on trust for you as the beneficial owner. You, the investor, hold the ownership rights to the assets via units in the fund.
If the company offering the fund goes into bankruptcy, they can be replaced. The fund continues to exist along with your investment in the fund and its related assets.
My investments have fallen so much, will they recover in value?
No one can give you guarantees about when markets will recover. However, looking at previous events causing equity markets to fall, and recovery times, you’ll see that negative periods tend to be shorter and less frequent than the positive periods.
Most investments in the sharemarket have a medium to long term (5 year) investment profile. These investments are likely to experience periods of negative returns from time to time but, over the longer term, returns have historically outperformed other asset classes. Investment decisions should take this long term view into consideration and be made in consultation with your financial planner.