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Are you switching funds when you don't need to?

Michael Keaveney

Michael Keaveney: On a busy highway at rush hour, we often see drivers frantically switching from lane to lane, seeking a path that is somehow clear of the slow traffic ahead.

And so it is with many investors.

Market volatility and the negative short-term returns we are currently going through, are the traffic jams of financial markets. They frustrate investors and can cause switching that doesn't always lead to better long-term outcomes.

When driving in heavy going, drivers figure out if it's just the result of normal traffic volume, or if something serious is going on up ahead. If there is something unusual, does it block the current lane only, or the lanes beside them too?

This is like the experience of investors when choosing which manager or ETF within an asset class. Far too often, investors mistake short-term performance differences as a signal to switch to another lane.

That signal often turns out to be false, and the other Fund is subject to the exact same short-term bumps in relative performance. While there can be valid reasons to switch from one manager to another within the same asset class, experience shows that even professionals do it too much, and often would have been better off sticking with their original well-chosen manager.

In a similar way, drivers sometimes ask "Are things so bad that it is time to get off the highway?" Here, they need to know the other paths to their destination, and, this is the key: Paths they know are clear?

Here, the analogy is to market timing. It's not enough to observe that an asset class is struggling. It is also necessary to understand the characteristics of the other potential asset classes, and if they help you meet your goals.

Investing, like driving, isn't always a smooth experience from door to door. You need to know the patterns of your planned path, and if other routes will get you where you need to go in the time you need to get there.

For Morningstar Investment Management, I'm Michael Keaveney.