Things you should 'social distance' from your investments

Business

Things you should 'social distance' from your investments

The Sterling Report

BY TONI ANN NEITA ELLIOTT

Sunday, November 22, 2020

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COVID-19 has affected our lives in so many ways. Face masks are now fashion accessories. Handshakes have given way to nods, waves and elbow bumps. Hugs are a major no-no and you refrain from coughing in public out of fear of the side-eyes, death glares and scorning that will immediately ensue.

It has made phrases such a 'social distancing' a common part of our daily lingo and changed the meaning of other terms and phrases we were using before. 'Rush-hour traffic' is a term more applicable to the Internet than the streets, as the work-from-home and remote learning policies have caused our cars to stay parked in their garages and driveways. And 'hotspots' now refer to cities with a significant number of coronavirus cases rather than locations of wireless networks!

Just as how we are social distancing from each other, to keep ourselves safe and slow the spread of the disease, should we be applying the concept of social distancing to our investments? Are there things that we should be keeping (6 feet) away from our investments?

EMOTIONS

As a financial advisor, I often find myself in situations where I am trying to protect an investor from themselves by exercising social distance between investments and emotions. The quickest way to lose money when investing is to be excited or scared. When we are scared or excited, or anytime we're emotionally charged, we become rationally challenged. As a result, emotions destroy more portfolios than markets do.

Any time there is a swing in the markets and a change in the value of your portfolio, either up or down it is natural for emotions to arise and for you to want to do something to either ease the anxiety (in a market dip) or feed the excitement (during a market boom). However, now more than ever, it is important to remember that long-term investment goals tend to survive temporary market shifts. Stay the course with a long-term plan and a well-diversified portfolio.

INSURANCE

My life insurance agent friends are going to give me a lot of flack for this view, but another thing that you should practice social distancing with is your investments and insurance. Most people buy insurance and consider it their first investment. However, insurance is a cover against the risk of occurrence or non-occurrence of an event and should be treated as just that.

Plans that promises you a mix of insurance and investment have premiums that are significantly higher than normal term insurance premiums and you rarely will earn a good return on your investment when you buy such a product.

Allow your insurance company to do what they specialise in and are good at (insurance) and allow your financial institution to do your investing for you. Buy a good term life and health insurance policy that provides you adequate coverage, so that you don't have to dip into your emergency funds or redeem your investments to meet health care costs, jeopardising your long-term goals.

EMERGENCY FUNDS

Funds that are dedicated as your emergency pool should be separate and treated differently from your other investments, but it does not mean that it all has to sit in a bank account. Low interest rates have been dragging on for over a decade. That is a long enough time to have some people, including me, rethinking the long-held advice that emergency funds should not be invested because the goal is liquidity, not returns.

Part of understanding risk and return is knowing that you are always exposed to risk. In the case of a cash savings account, your predominant risk is inflation — the risk that rising prices will outpace and erode the buying power of your money over time. A conservative, liquid investment such as a repurchase agreement (“repo”) or Promissory Note can help you to protect your emergency fund by earning a high enough return to stay ahead of inflation without sacrificing easy access.

I can't think of many scenarios in which a person actually needs quick cash, rather than just quick access to money. In an emergency, you could easily put an expense on a credit card, then transfer money from an investment. So social distance your emergency funds from your other investments in how you treat the funds but do not limit yourself to only a bank account.

It will be interesting to see if 'social distancing' will eventually disappear from our daily vocabulary, if we will resume hugging as a greeting, and if we will feel naked when venturing out into the world without a mask! But hopefully we will continue to social distance our investments from our emotions, insurance and our emergency cash, even after the pandemic has passed.

Toni-Ann Neita-Elliott, CFP is the AVP Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm


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