"I have a regular savings contract, and have received a letter from about my policy that has raised two concerns that I would be grateful if you could assist with. Firstly I have received notice that a property fund has been suspended. I am confused by what this means, could you explain this please. Also I am concerned generally about the value of my policy. What should I do?"

The world’s stock markets have for the last few months, and are continuing to experience volatility. This is due to a number of factors such as the sub prime housing issue in the USA, and the financial products that were sold containing this debt, high oil and commodity prices, and worries over the supply of these, the state of the US economy and the mention of a US recession and finally a banking fraud on a huge scale.  On their own I do not believe these issues would have affected the markets as much as they have, but combined these have led to widespread confusion and uncertainty, which in turn has had a negative effect on the value of stock and shares and so reduced the value of your savings contract.

As to how long this volatility is going to continue for is of course impossible to say, and if I could predict this I would be very rich indeed, but I think it is worth remembering why you are saving. It may be for children’s university funding, your retirement, or just so that you have something to show for your time in the Middle East, but it is worth reminding yourself as to why you are putting this money aside each month and focusing on your ultimate goal. Your financial advisor will be happy to run through this with you as well to help clarify why you are saving.

It would also be worthwhile running through you attitude to risk, and what you believe to be an acceptable level of risk. When markets are going up it very easy to forget about risk and just enjoy the growth, but when markets fall it brings risk sharply back into focus. However if you look back over the last 100 years, equities have vastly outperformed any other form of investment, and it is worth mentioning another catchphrase, that it is time in the market and not market timing that gives you your returns. Basically the longer you are invested the timing of the investment becomes largely irrelevant and the performance should reflect that.

If you are saving regularly there is another benefit to remember, and that is dollar (or sterling/Euro or whichever currency that you are saving in) cost averaging. This is the effect of drip feeding your money into funds on a regular basis over a period of time.

By saving regularly into a unit-linked investment the investor can still benefit from stock market fluctuations. The graph below compares how regular contributions into a steadily performing fund and a badly performing fund can produce rather surprising results. In each case US$1,000 per annum is invested over a 10 year period.
 

 Investment outlay Number of units bought Unit Price after 10 years Value of unit holding
Fund A US$10,000 4,840 US$3 US$14,520
Fund B US$10,000 26,580 US$1 US$26,580

Fund A’s unit price triples in value over the period, the number of units bought reduces or remains constant all the time, and the total number of units bought is 4,840. On the other hand, although Fund B only manages to recover its original price after 10 years, the investor benefits from being able to purchase more units for his premium - the total number of units bought is 26,580. This is a very simple set of figures, but even so it shows that it is possible to benefit from falling markets.

The other query raised in the reader’s question relates to a situation that has occurred with a number of property funds recently. Generally there are two types of property funds. Ones that invest into shares of property companies, such as Emaar and Nakheel here in the UAE, and funds that actually buy physical property, such as office blocks, shopping centres and other commercial real estate. The funds that buy shares will rise and fall with the value of the underlying asset like any other mutual fund and can be bought and sold daily with no problems.

With a fund that holds ‘real’ assets however, there can be occasions when this is not possible, for example when there is an unexpected fall in the market and investors decide to sell their holding. This is fine if the fund has sufficient cash, but it may need to physically sell a property to meet the investor’s requests. When this happens the fund manager can put a block on investors selling their investment to protect the fund and the remaining investors, and only allow the sale to take place when it is acceptable to the fund, rather than being forced to sell an asset at an inopportune time.

The fund that you are concerned about is held through a platform which allows free switches of funds, so it is not the overall savings plan that is affected, but one of the funds. Therefore I would suggest that it is a good time to review your policy and make changes as necessary.

As always we at Acuma welcome your questions and enquiries directly so please do not hesitate to contact us if you would like to discuss this or any other issue in more detail.