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7 Rules of Investing - Understand the implications of withdrawing - Rule 5

Understand the implications of withdrawing

It is important that before you make an investment you understand all the implications, risks and costs involved. The same is true before you withdraw from an investment. It is imperative that you are aware of and know what the implications and costs will be.

There are three major considerations which you should consider before you withdraw from a fund or other investment:

  • Crystallising losses

Selling as an emotional response to market movements can create problems. If the value of your investment is falling, you are only making a loss on paper. A rise in prices could soon return your investment into profit without you doing anything. Selling your investment makes those losses real and irreversible.

  • Capital Gains Tax

Make sure you know what your Capital Gains Tax (CGT) position will be before selling any investment in a managed fund. CGT is payable on any gains made on an investment and is payable when you sell that investment. If you’ve had an investment for less than 12 months it can be up to 46.5%. If someone is selling an investment because of a short term loss after a long period of sustained growth (such as between 2001 and 2007) then they could attract a signification CGT liability because of the long period of growth.

  • Losing the benefits of compounding

If you’re thinking about making a partial withdrawal from a fund, remember you will lose the effects of compounding on that withdrawal. Take a look at this case study example where a $5,000 withdrawal results in a signification loss of earnings potential. It’s not just the withdrawal you lose, but all the future earnings on that withdrawal.

For example:

Erica and Steve both invested $30,000 in a managed fund. Steve was going on an overseas trip and needed to pay for it, so he withdrew $5,000 from his investment. Steve enjoyed his holiday but lost the investment power of his $5,000.

After 10 years assuming an average return of 8% pa for both investments, Erica’s investment has grown from $30,000 to $64,768 whereas Steve’s $25,000 has only grown to $53,973, which is $10,795 less than Erica. Of course, for shorter periods, say six to seven years, the difference is less but the message is clear – staying invested can have positive results for your investment. (The returns used are illustrative only)

Source: Colonial First State

This information may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we have given

you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.

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