The recent sharp negative performance of equity markets
around the world and the questionable financial viability of
several companies, has many investors concerned about their
At times of such market uncertainty and negative sentiment,
people often think the worst. The following information is
aimed to dispel some myths and to provide an update in
relation to client investments.
Is my money safe as
I’ve heard that some companies might go broke?
While share investments in particular have
been the hardest hit and have fallen in value recently, if
you hold a diversified range of shares it is extremely
unlikely that you will lose all of your investment.
Being diversified in shares can simply mean that you invest
across a range of different shares rather than just in one
or two. And this is what managed funds do.
How does a managed fund
A managed fund, also known as a unit trust,
is a vehicle that pools your money with that from a number
of other investors. These funds are then used by the fund
manager to purchase assets – in the case of an Australian
equity fund this is predominantly shares listed on the
Australian Stock Exchange.
So I’m not investing in
the company who is offering the managed fund?
Most of the time, no you’re not. Your
investment in respect to an Australian share fund, for
example, is usually spread across a range of anywhere
between 20 and 60 different shares. This may include names
such as BHP, Westpac, Qantas and Woolworths.
I guess it’s unlikely
then that I would lose all that I’ve invested in an
Australian share fund?
Yes, it is very unlikely. A fund may hold
between 60 to 80 stocks and these would all need to go into
bankruptcy. This is one of the benefits of investing in a
managed fund; you’ve diversified your investment across a
number of different assets or companies.
What if the company
offering the managed fund goes broke or into liquidation?
This does not mean that your investment in
the related fund will be lost. The assets (eg shares) held
in the fund are held on trust for you as the beneficial
owner. So it is you, the investor, who holds the ownership
rights to the assets via units in the fund.
The legal owner responsible for administering the fund and
the assets is known as the Responsible Entity. If the
company offering the fund does go into bankruptcy the
Responsible Entity can be replaced. The fund will continue
to exist along with your investment in the fund and its
Even if I’m unlikely
then to lose all of my investments, they have fallen so much
that it may be quite some time before they recover in value?
No one can give you guarantees about when and
how quickly markets will recover. It is interesting though
to look at previous events that caused equity markets to
fall and how long it took for markets to recover. Some
1987 sharemarket crash
United States when the market fell by around 30%. It took
22 months for the Dow Jones to return to its pre crash
September 11, 2001
terrorist attack sent panic through investment markets which
immediately fell in value. It took the Australian equity
markets (S&P/ASX 300 Accumulation Index) only 22 days to
recover to the pre September 11 level.
Most of the funds invested in the sharemarket have a medium
to long term (5 year) investment profile. It is important
to remember that this type of investment is 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.
Every event and related impact on financial markets is
different and so too is the time that it takes for the
market to recover to pre event levels.
I’m just about to retire and planned on having the full
amount of my investment to
Superannuation investment earnings
are taxed at 15% and are not taxed if transferred into a
pension account, after retirement. On average, retirees
have a life expectancy of around 20 years which is a good
period of time to allow for a recovery in financial
markets. Your financial adviser can discuss the best
approach for your particular situation.
The above information is general in nature
and does not take into account your personal situation or
needs. Before deciding to acquire or dispose of
investments, you should consider the relevant Product
Disclosure Statement (PDS) and whether it is appropriate for
you. You may wish to consult a licensed financial adviser
prior to making any decision in connection with your
investments. Past performance is not indicative of future