In this fourth post in our series on managing your portfolio we're going to look at making an investment switch.
The term switch is important to note because when investing in ISAs we never make buy or sell orders. Selling your ISAs instead of switching, could be one of the worst mistakes you ever make. This is because, once you’ve sold your ISA, you won’t be able to put the proceeds back into your ISA account. Let’s look at how switching works and review the three rules.
Rule 1 – In bull markets (uptrend) invest into funds
Rule 2 – If your fund underperforms, switch into another fund
Rule 3 – In bear markets (downtrend) park in cash
Market cycles are continuous. After the bull market is over, the bear market begins. When we believe a new bear market has begun, we switch into cash and stay in cash until we believe the bear market is over. The cycle of bull market followed by a bear market continues forever.
Three types of possible switches
Whilst investing, you will encounter three types of possible switch scenario.
1) Switching from an investment fund into an alternative investment fund.
2) Switching from an investment fund into the ISA Cash Park/SIPP Bank Account.
3) Switching from the ISA Cash Park/SIPP Bank Account into an investment fund.
1) Switch from an investment fund into an alternative investment fund
The first type of switch occurs only during bull markets. This type of switch will occur when you are invested in a fund that you believe is underperforming. When this happens, you have the option of making a switch from the underperforming fund into an alternative fund.
For example:
- The market is in a bull phase
- You own 4 funds: Fund A, Fund B, Fund C and Fund D
- You have a 25% allocation in each fund
- You are 100% fully invested
- Fund D is underperforming
- You make a switch out of Fund D into Fund X
- After the transaction is complete, you own Fund A, B, C and X
- You have a 25% allocation in each fund
2) Switch from an investment fund into the ISA Cash Park/SIPP Bank Account
This second type of switch occurs when you believe the market has changed from bull to bear. This type of switch will occur when you are invested in a fund and believe the market has changed its major trend from up to down. When this happens, you have the opportunity to make a switch from the fund you own into the ISA Cash Park/SIPP Bank Account.
For example:
- The market is in a bull phase
- You own 4 funds: Fund A, Fund B, Fund C and Fund D
- You have a 25% allocation in each fund
- You are 100% fully invested
- A new bear market begins/a major downtrend is triggered
- You make a switch out of Fund A, B, C and D into the ISA Cash Park/SIPP Bank Account
- After the transaction is complete, you are 100% invested in the ISA Cash Park/SIPP Bank Account
3) Switch from the ISA Cash Park/SIPP Bank Account into an investment fund
This third type of switch occurs when you believe a new bull market has begun. This occurs after a bear market is over and, if you got your timing right, you will be parked in the ISA Cash Park/SIPP Bank Account. When you believe a new bull market has started, you switch from the ISA Cash Park/SIPP Bank Account into an investment fund.
For example:
- The market is in a bear phase
- You are 100% invested in the ISA Cash Park/SIPP Bank Account
- A new bull market begins
- You make a switch out of the ISA Cash Park/SIPP Bank Account into Fund E , F, G and H
- You allocate 25% to each fund
- After the transaction is complete, you are 100% invested
- After the transaction is complete, you own Fund E, F, G and H
The number of switches to make in a typical year
Normally, we make no more than four switches in a year. As soon as we believe the new bull market has started, we switch into high quality investment funds.
We then remain invested all the way through the bull market and will only switch into an alternative fund if our fund or funds are underperforming. We also remain fully invested in funds during bull market corrections. Bull market correction periods can be anything from 8–25% in depth.
As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
About ISACO
ISACO is a specialist in ISA and SIPP Investment and the pioneer of ‘Shadow Investment’, a simple way to grow your ISA and SIPP. Together with our clients, we have £57 million actively invested in ISAs and pensions*.
Our personal investment service allows you to look over our shoulder and buy into exactly the same funds as we are buying. These are investment funds that we personally own and so you can be assured that they are good quality. We are proud to say that by ‘shadowing’ us, our clients have made an annual return of 12.5% per year over the last four years** versus the FTSE 100’s 7.4%.
We currently have close to 400 carefully selected clients. Most of them have over £100,000 actively invested and the majority are DIY investors such as business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector such as IFAs, wealth managers and fund managers. ISACO Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Our firm reference number is 525147.
* 15th November 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
** (31st December 2008 - 31st December 2012).
ISACO investment performance verified by Independent Executives Ltd.
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