I find the human psyche interesting but often illogical. I refer to an incident at the end of January 2008. An investor, disillusioned with his pension for years, finally made the decision to transfer. The company previously looking after it had diabolical administration and the performance of their funds ranged from indifferent to downright poor.
The investor believed he had found a better firm, chosen some promising new funds, completed all the paperwork and was ready to proceed. He was then informed that stock market falls had cut the value of his existing investments, meaning the amount of money to transfer was materially less. He decided not to proceed, as though it was more serious to crystallise the loss than live with it.
That was a natural reaction but I feel it was also illogical. Nobody likes to lose money but surely he must have believed that the new funds he had chosen would offer a far better chance of making the money back. The market falls also meant that he could have bought into the new funds at a lower price so it would have given him a good starting point despite his losses. Plus, of course, by not transferring he was still stuck with the terrible administration of his old pension provider. A more professional organisation would surely have made it easier for him to keep on top of his pension, and ultimately improve his quality of life in retirement.
The fear of selling investments at a loss is something I see often. It appears that investors prefer to sell the investments that have made them most money and keep the ones that are showing a loss. Why? The chances are that the bad ones will continue to languish and the better ones will still deliver. Many investors seem to have a mental block about crystallising losses, but that is often the right policy. Cutting your losses and switching to something with better potential is sage counsel.
Peter HargreavesFind out how you could potentially improve your pension by transferring to the HL Vantage SIPP.
