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, is 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 Investor’s 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 over exposed 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 COVID 19 pandemic has resulted in significantly less Airbnb bookings due to minimal travel. Many companies who pre-covid investors considered as sure dividend payers, 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 who are invested 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.

 Dwayne Hunter 

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

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