Are you following the herd to go and get your money from your money manager because of a rumour or did you check the information to see whether it has some basis first?

The Ghanaian financial sector has been reeling under the weight of panic withdrawals for the past two years plus because of the crises that has hit the banking sector.

The investment sector has not been spared either in recent times.

Yes, in some cases the run on one institution may be justified, this discussion is not to stop you from going for your money in such a case.

But if we all decide to go with the herd without any checks, very soon we will collapse all our financial institutions and there will be no winner when that happens.

The Chain Effects of Panic Withdrawals

Panic Withdrawals are dangerous because of the damaging impact on economic activity and loss of wealth at both individual, business and economy levels. 

  • First, you may lose some money as you force the investment manager to sell off assets at steep discounts to be able to meet your withdrawal demands.
  • If you are in a collective investment scheme, the desperate and unplanned selloff of otherwise good medium to long term assets at huge discounts, will lead to a loss of potential future returns and affects those who stay in the fund.
  • Sound institutions can collapse from the reputational crises from not been able to meet cash demands because no financial institution, regardless or how well run, can immediately meet the cash requests if all their clients decide to come for their monies at the same time, because financial industry models function on orderly inflows and outflows. But during such panics, inflows dry up, assets are not all liquid and easily converted into cash and the bad rap from clients who cannot get their money at the expected times compounds the situation with each passing day.
  • We all start hoarding money or running to 'safe' investments like government securities, instead of giving monies to financial institutions to use for their work of connecting those who need the money with those who have it in exchange for returns.
  • Now this comes back full circle because when you now need money for personal or business use from financial institutions and markets, no money will be available.
  • You cannot finance personal consumption purchases of goods and services much more invest.
  • Businesses cannot finance operations, business sales go down because consumers do not have money to buy goods and services, businesses lay off employees or collapse and if you happen to be one those losing their jobs, you lose your income.
  • The entire economy grinds to a halt because the economy does not work in a vacuum, it grows when we are making goods and services and spending to use those goods and services and if there is no money, none of that will happen.
So what if there is a way for you to assess the safety of your investments on an institution by institution level to arrive at an objective view of whether your investments are safe or not?

And, yes, there are ways to do just that.

If you understand how the investment management business, processes and industry functions you will realize that in a majority of cases the run on an institution was unjustified and it is actually the run that cause the liquidity challenges and not bad investments or decisions.

Sources of Fears that Fuel Panics

There are four main sources of fears that fuel runs and associated panic withdrawals. These fears come from true or untrue information that cause you to doubt that your assets are safe because:

  1. You are not sure how your ownership is documented and protected
  2. You fear that the investments in your account may be worthless or hard to recover
  3. You fear that the company may be going out of business
  4. You are not sure how regulation protects your interest or you lack confidence in the ability and commitment of the regulator to protect your interests and assets.

In all these fears, all you are worried about is how to protect your assets or money.

So, what if I show you that there are ways for you to check and get reasonable assurance of safety, would you pause and check first?

I hope you do.

And by looking at the four fears that fuel such panics, you will realize that there are simple things you can do and steps you can take to protect your investments right from the beginning and periodically assess to convince yourself that your assets are still safe or not.

This episode is the first part of my series on panic withdrawals. And in each episode, I give you tips about how you can assess the safety of your investments with your investment manager, right from the time you make the first deposit. 

I give you simple things to do to begin securing the safety of your assets and to know how you can get your money or assets out if you come to the decision to do that, based on the type of account you have with the investment manager.

Episode 1 - First Three Tips

In today's episode, I discuss the first three ways you can assure yourself that your ownership interest is secured by answering the following questions:

  1. What type of account do I have with manager? 
    • This determines the options available to you when you decide to leave your manager and whether you can get your actual assets or just cash.
  2. How is My Ownership Represented in the underlying assets based on the type of account I have?
    • This  determines where action will be taken to recover assets, and here again, whether you can get the actual securities or just cash.
  3. What Record Do I Have as Evidence of My Investments?
    • This Determines the various types of records that you will have available to confirm the existence of the investments that have been made for you based on the type of account you have.

So your task after listening to this episode is to go through these questions with each investment that you have with each investment manager and make sure everything checks out.

Yes, there may be situations where one or a few investment management firms may have erred or the regulator may have been slow to act, but do not in your haste to leave that manager, create or contribute to creating an environment that penalizes institutions with very sound practices and otherwise stellar records for the sins of another. Nobody wins in the panic that ensues!