5 Most Common Mistakes in Regular Savings Plans

The majority of us will probably start our investor journey with a regular savings plan. In the UAE, they are the 2nd most mis-sold product (after whole of life policies) by many “financial advisers”.

These products, provided by Life Companies and Investment Platforms, allow investors to save a on a periodic basis (monthly, quarterly, bi-annually or yearly) and to buy units in mutual funds, that over the medium to long term will appreciate in value and generate growth (returns) on the investment.

The main benefit of saving regularly is “dollar cost averaging” or “unit cost averaging’ (as the same can be done in any currency), which is achieved by buying units in the same assets at different dates and different prices. In the end, what’s important is how many units you managed to accumulate, what was the average price per unit bought and where the price per unit is today.

With good discipline and a “strong stomach”, these types of plans can actually generate returns over a medium to long term. However, I have come across too many 4-8 year old savings plans that are not even breaking even. I see, all too often, these common mistakes made by investors and advisers, which are as follows:

1. Lack of long-term strategy

Based on each client’s risk profile (I’m talking about a proper risk profile, not a bar from 0-10 and the question “where are you Mr. Client?!”) there should be a clear understanding about how much volatility can a client accept seeing on their valuation. Once that has been agreed, the client should be aware of how the valuations might look at different points in time and what that means.

2. Unnecessary fund switches

It is an adviser’s job to review each client quarterly or however often the client requires. During these reviews, the client usually tends to expect something new from the adviser whilst the adviser wants to look “active” on the client’s portfolio, therefore, fund switches are being suggested and actioned. Most of times, these fund switches are done wrongly and without the understanding that there is a high chance to transform a regular savings plan into a lumpsum investment.

3. Crystallisations of losses

I personally have been asked many times by clients to “cut their losses” as the portfolio wasn’t performing at that particular time. Go back to the first point and remember the long-term strategy. Bad performing assets should never be sold unless the client actually needs cash out of the plan or they are grossly outside the client’s risk profile.

4. Reducing the premium (in contractual savings plans)

Whilst this option is available in all “life company’s” savings plans, it’s a feature that shouldn’t be accessed unless it is greatly needed (loss of or reduced income). However, people tend to do it if the performance is shy to appear or the valuation is negative. When reducing the premium, you cancel your chances of buying more units of an “undervalued” asset, which once it recovers in value, would have given the desired performance.

5. Payment holiday (in contractual savings plans)

Again, this option is available in all “life company’s” savings plans, however, keep in mind that whilst your premiums are paused, all the charges associated to the set up and ongoing admin & management of your savings plan keep on going. At that point, your savings plan becomes a “lump sum investment” as you won’t be able to average the cost of units moving forward, unless you restart the payment of premiums.

These are the most common mistakes made by clients and unfortunately advisers too. If you can avoid them, please do so and you will be able to enjoy real growth on your savings.

Last thing; please don’t ever forget that the contribution amount is not paid all in one go. Way too often clients are saying “I paid 100,000 USD and the value is only 115,000 USD. If I kept this money in a bank I would have made the same without any risk”. True but, you haven’t placed 100,000 USD in one go. You placed 100,000 USD in monthly premiums of 2,000 USD (or whatever amount) and the premium paid in the first month had the most available time to work for you, while the last premium made had no time to work for you. In order to understand the performance correctly you will need to look at the valuation at the anniversary date and compare it against an illustration.

If you need any help with understanding how your regular savings works and why the performance is not really there, don’t hesitate to ask for help!