There are times when stock markets around the world fall in value very sharply, and very quickly. Fortunately these occasions are not common, and they are far outweighed by the occasions that the value rises which is where a lot of investment return comes from.

When values are falling it can be tempting to remove your money, to stop the rot. This is generally a very bad idea.

Some say you should ignore markets when they do this and just wait for them to go back up. While there is some truth in this, it is also not always the best course of action.

To choose the best course of action investors should understand the unit linked nature of their funds. Your money has bought a number of units in various funds; some of these funds rise and fall with the stock markets, but investors also hold bond funds which are more cautious so values are expected to change much less.

If the price of these units falls, a loss is only made if the units have to be sold. When house prices fall, it is a bad time to sell your house, and this is a similar principle.

WuyW investors hold (where possible) sufficient cash inside their products to pay for contractual charges, and withdrawals for the year ahead, without selling any of these units. This allows investors to let their stock market units fall in price and await a recovery.

If that recovery takes longer than expected, some units may have to be sold from the bond funds to replenish the cash required.

It may also be the case that your annual re-balance of the stock market (equity) funds and bond funds. In most years this involves moving profit made from equity to bonds; when stock markets fall it can mean selling bond units and buying equity ones. This should still be done because when stock market prices recover, you will have more units than you started with and be better off as a result.

The conclusion: when stock markets fall sharply, don’t panic. Ensure you have sufficient cash to pay withdrawals and charges for the next year or two, and re-balance as normal. If you have any concerns, call Greg and he can answer any questions.

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