Ten Questions to Ask

Before you decide to switch or redeem an investment

During these uncertain times in the market, many investors would like to take action with their current investment-any action will do. They feel that whatever investment they are in is obviously not performing like it should (since it is down), and therefore changes are required. But not all investments need to be scrutinized. We don't want to act just for the sake of taking action when we could be holding perfectly good investments that just happen to be down on a temporary basis. To help you decide which investments to keep and which ones to switch, here are 10 questions to ask yourself. Answer them honestly, as it could affect your long-term finances.

1. Has the investment changed its management approach?
   If it hasn't, and it was chosen to match your long-term financial objectives, it may still meet those objectives even though it has decreased in a bad market.
   
2. Are the reasons you chose this investment still valid?
   Take a moment to revisit your original investment objectives. Was this investment chosen because its long-term goals were compatible with yours?
   
3. Has your investment horizon changed?
   If you have several more years to invest (five or more), switching or redeeming now may be a short-term mistake with long-term consequences.
   
4. Has someone given you a "hot tip" or a "better" investment idea?
   Friends and family members mean well when they share investment tips, but is their advice backed by concrete information and analysis? Does it follow your intellectual framework for making investment decisions? Or is it just a good story?
   
5. Have you weighed risk and return?
   You may be in a suitable investment with minimal downside risk and good long-term growth prospects. Jumping to a higher- performing investment may seem appealing now but could cost you sleep over the years because of its higher volatility and increased risk levels.
   
6. What are your alternatives if you switch or redeem now?
   Will you be satisfied with a money market fund yielding less than .5% annually when the equity markets are approaching bottom? There is a risk to every decision and sometimes opportunity risk is the greatest.
   
7. Will switching investments cause you to be over-weighted in a particular sector?
   This may increase your portfolio's risk should a downturn in that area of the market occur. You should determine what the changes would do to the risk levels in your portfolio (too high or too low).
   
8. Is the investment designed for strong performance?
   Some funds perform better under different conditions (e.g., strong versus weak markets). You should understand both the investment you are in and the one you are going to move into in relation to the current market cycle. You could be doing the wrong thing at the exact wrong time (i.e. selling low and buying high).
   
9. Will your portfolio still be properly diversified?
   Having the right asset allocation between fixed income and equity investments and between domestic and international investments, between value and growth, between large caps and small caps helps to offset the effects of market volatility over the long term-in other words, will the switch make you more or less diversified?
   
10. Will you trigger capital gains and tax consequences?
    Some investments held outside a RRSP may generate a tax bill that reduces or eliminates the advantage of leaving an investment.

Review your investment strategy. If you are lamenting the strong performance of an area in which you are not invested or are itching to make a move, it is wise to reconfirm your investment objectives. Remember the words of investor Jesse Livermore:

Overhauling a sound intellectual framework just to satisfy short-term performance envy will not help your long-term objectives.