Björn Berg answers questions by the readers of online news outlet Vísir.

A 72-year-old man asks:

One of the most common mistakes investors and savers make is moving money because of returns that have already happened.

Unfortunately, it seems to be part of human nature to judge where money should be placed by looking at past performance.

When the past drives decisions

There may be useful lessons in looking decades back and seeing how markets move, and how returns appear over long periods of time.

But looking too closely at the recent past can easily mislead us, especially when the period is shorter than a year.

We wouldn’t advise foreign tourists to pack only shorts and swimwear for a winter holiday in Iceland just because the summer was warm and pleasant.

In the same way, we shouldn’t move money into an indexed account simply because of past inflation, or buy foreign currency just because the króna has already weakened.

What has already happened tells us very little about the future.

Still, many people make these decisions with poor results. We see the same behaviour when people invest in funds.

Six months is a short time

I don’t know which fund or asset management option you chose.

But it’s important to remember that six months is a very short time in financial markets.

I know it can hurt, and cause real anxiety, to see your assets fall in value. But making a decision about an investment strategy based on a six-month period is questionable, no matter what kind of investment we’re talking about, unless the plan was only ever to invest the money for six months.

For such a short period, securities are rarely considered suitable. Bank deposits are usually the more common place to keep money you may need soon.

It’s also worth remembering that nothing is actually lost until you sell at a loss.

The price of funds is calculated daily and moves in line with the market value of the underlying assets. In the stock market, poor periods can last for several years. Historically, stocks have had more frequent and longer weak periods than lower-risk assets, but they have also delivered higher long-term returns than most other options.

Investments in securities markets are generally not meant for very short time periods.

If you start choosing investment options based on recent short-term performance, you may be playing a rather strange game when the textbooks keep telling us to follow simple principles with a long-term approach.

So where should savings be kept?

I’ll share my general view on investing here, but nothing I know about your situation is enough for me to say exactly where your savings should be placed.

In most cases, it makes sense to keep money in a way you understand and feel comfortable with.

With that in mind, this may be a good time to review your current investment. But don’t review it only by looking at past returns.

Where do you feel most comfortable keeping your savings, and what is the goal of the investment?

Is the goal simply to receive as much as possible from taxpayers through social security payments, regardless of your own returns?

Is the goal to try to grow the savings as much as possible, while accepting fluctuations and some risk?

Or is the goal to focus mainly on protecting the value or your savings?

Once those questions have been answered, an experienced adviser at your bank should be able to help you reassess your investment strategy from this point forward.

The effect on social security payments

You mention that you moved from bank deposits into asset management at a bank because interest income reduced your payments from TR.

That’s correct. Interest income can affect payments from the Icelandic Social Insurance Administration.

When you invest in a fund, reductions and taxes may be deferred, because no gain is created until you sell. Over the long term, such investments can allow you to keep investing money that would otherwise have gone towards capital income tax, currently 22%, and benefit reductions.

In that sense, the money can continue to compound without those reductions until the investment is sold. That can be valuable, especially because capital income tax can be significant on large sums.

But there is another side.

If no capital income is realised in a particular year, you may not be using the yearly tax-free allowance for capital income. You are also deferring tax, and it’s possible that capital income tax may be higher later. It has already risen a great deal since the financial crisis, and unfortunately there seems to be political interest in raising it further.

Next steps

It’s clear that you feel uncomfortable with this investment and with the results so far.

I’m sure the private banking team at Íslandsbanki will be willing to sit down with you and go through the matter again.

Be honest and clear when you explain what you want.

And remember, you’re allowed to change your mind.

It’s your money.