Predictable vs Predictable

ONE of the many things I have observed during this pandemic is how similar people and investments are. I know this seems like a strange thing to say, but journey with me for a few and you will see the similarities too.

One of my friends and I had a conversation about curfew compliance a few months ago, and she said: “The persons who are law-abiding citizens will be law-abiding during the curfew, and those who are not generally law-abiding will be who they are.”

So generally, people are predictable in their behaviour no matter the situation. What my friend was saying was that, as much as people are similar, they are also very different and have predictable behaviour patterns.

Let us look at investments now. All investments share one thing in common, or function, as I like to say, and that is to make investors money — either by capital gains or income. This should remain consistent, even during challenging times. We should always keep in mind that the main goal of investing is not for today but for the long term.

How different investments behave in uncertain times

Investments are similar but they navigate differently through the varying economic occurrences. It is easy to get caught up in the “fear of missing out”, when things are good and overly vibrant. Unfortunately, this may lead to some investors taking on more risk than they should and ending up with an overexposed portfolio. Another result is that investors may perceive some investments as providing predictable income when in fact those investments do not. For example:

Many investors have taken on too much real estate with the thought of getting a piece of the Airbnb pie, and viewed this as a source of predictable income.

Many have taken on more stocks than they should with the expectation of predictable income via dividends.

The coronavirus pandemic has resulted in significantly less Airbnb bookings due to minimal travel. Many companies that investors considered as sure dividend-payers PRECOVID have either made the decision to suspend dividends or, in some cases, been asked to do so. The reality is, companies have to manage their cash flows and in so doing can negatively impact their shareholders’ cash flow.

This leads us to fixed income investment, which can be looked at as somewhat boring. Investors in high-quality, fixed income investments have often been spared the full brunt of the pandemic on their cash flow. Whilst high-quality companies can decide to suspend dividend payments during a pandemic, they do not have that luxury with their fixed income obligations. This is not to say there have not been setbacks in the fixed income field. However, high-quality fixed income investments have performed extremely well during this pandemic and have been a source of true predictable income.

I have never experienced a pandemic before but I have experienced hurricanes and a recession. The lesson learned from those experiences is the importance of predictable cash flow. The true value of an investment is how it performs its duty during challenging times or when you need it to work most. A predictable cash flow transcends any challenging periods and can make even the most uncertain of times more manageable. Therefore, when deciding on your portfolio construction for the long term, be mindful that like people, investments have different predictable patterns.

Choose your predictable.

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Dwayne Hunter is the AVP, personal financial planning at Sterling Asset Management. Sterling provides financial advice and instruments in US 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.