Sterling urges reinvestment wisdom

Boutique investment house Sterling Asset Management Limited is urging careful consideration as investors move to reinvest their money in an atmosphere of declining interest rates.

Anna-Joy Tibby, Sterling’s assistant vice-president in charge of personal financial planning, says now that the central bank has began cutting its policy rate, there needs to be a careful approach on the part of investors to treat with maturing investment instruments.

Tibby said that while finance houses have not reacted with the expected alacrity to the signals being sent by the central bank, investors should be aware that it will take time for the market to respond. At the same time, she warned that investing ought not to be conducted only on the basis of higher yields.

Those who have come into a lump sum of money, whether from the sale of property, a bond maturity, or maturing insurance policies, may want to avoid the pitfalls of chasing higher yields without considering risks. It’s also prudent to diversify, she said.

“What you don’t want to do is put it [lump sum] into any one thing. We have to look at diversification. We have to understand the interest rate climate,” she said at a forum hosted by Sterling.

Giving the example of a client buying a 12 per cent bond when interest rates are declining, Tibby said such a move may be foolhardy, given the possibility that such a rate is really an outlier at a time of declining rates.

“You have to understand that along the market continuum, whether from low to high risk, that would have been in the higher-risk category,” with the possibility of the debt being defaulted on down the line as “such an instrument was risky from the very beginning,” Tibby said. The investor should consider issues such as credit quality and the credit rating of the specific asset to get a better understanding of the degree of risk, she added.

Tibby noted further that while such analysis and understanding usually comes from a licensed financial adviser, investors have a responsibility to educate themselves.

“You have to have various opinions, you have to call around, get different opinions on different investments. Don’t just take one person’s opinion and run with it. You have to seek others. It’s not easy, but understanding it for yourself, self-education, is a key aspect of prudent investments,” she implored.

neville.graham@gleanerjm.com