Second thoughts on the search for "safety"

Don't sanitize your portfolio out of existence

We’re reading a lot about the “flight to safety” in markets and investments. Cash, GICs, Treasury bills and bonds, money market funds are all the rage for the anxious and panicky. It’s understandable, of course, as the COVID-19 virus pandemic spreads fear and panic through global financial markets as a nasty side effect. But is that flight to safety the right thing to do right now?

Individuals with savings committed to long-term investment portfolios, mostly for retirement planning, are extremely concerned about the effect of the market crash on their long-term net worth goals. Many have decided to liquidate their equity holdings and even their fixed-income assets, and move entirely into cash – meaning highly liquid vehicles such as bank deposits and money market funds (Treasury bills).

The real question is, why now? Wouldn’t it have made more sense to do that a few months ago, when stock market indexes were touching record highs and stock valuations were being stretched to their limits? Or better still, might it not have been a good idea to switch to more cash immediately after the yield curve inverted last August? These markers are not just an example of 20/20 hindsight. Experienced investment managers have been using them successfully for decades to adjust portfolios to more defensive positions before the storm (whatever it turns out to be) hits.

Psychologist Abraham Maslow proposed an answer in a theory he floated in 1943. His original hypothesis posited a hierarchy of five levels of human needs that drive motivation. Envisioned as a pyramid, he argued that starting at the base, deficits at each level of need would have to be largely satisfied before the next level would be met.

Deficiencies in physiological needs (food, water, and shelter) had to be satisfied before everything else. These are pretty strong motivators. But the next level, according to Maslow, was the need for safety (security, order, law, stability, and freedom from fear). Only after deficiencies in these two basic levels were largely satisfied could humans attend to needs for love/belonging, esteem, and self-actualization.

It doesn’t take a lot of deep thinking to see that right now, safety needs are the paramount concern driving human motivation. Every action in the current environment, from “social distancing” to self-isolation and frequent hand-washing, meets that basic need for safety. And, paradoxically, so does selling riskier investment assets like stocks, and moving into “safe-haven” assets after markets have already melted down and the smart money has long since taken profits. The desire to flee, to find safety, to abandon the Titanic before it goes down, is almost overwhelming. But, in fact, this may be the worst time to abandon your portfolio to look for “safety.”

During especially fearsome periods, as we’re witnessing now, it’s best first of all to review your financial plan and revisit your investment objectives to ensure your investment portfolio is still in line with your goals. If it is, then you should be able to ride out the storm.

Yes, it is almost certainly difficult emotionally to stick to your plan and stay invested. (After all, you’re fighting that ingrained Maslovian need for “safety.”) It’s hard to do when all your news and social media feeds are screaming “market crash.” But remember, panic selling will only leave you with more doubt and fear – doubt that you’ve done the right thing when markets take off again (and they will), and fear that you’ll lose out on the biggest gains, which typically occur early in a subsequent rally. Buying and selling when market gyrations are making headlines only incurs extra trading costs, creates possible tax issues, and dampens your overall longer-term returns. But if you have a solid investment strategy and a good advisor, trust them to do their job.

The best advice, for both self-directed and advisor-assisted investors, is to keep your wits about you and stay focused on the long term. Investing is a lifelong process, and if you were to sell every time the markets corrected (or, yes, even crashed), the chances of getting back in just before a rally, recovery, or bull market are slim.

Playing it smart

It is far more prudent to approach your portfolio decisions from an overall asset allocation perspective. By this, I mean you should decide honestly about your level of risk tolerance. Then construct a diversified portfolio comprising safety, income, and growth categories in various proportions that reflect your risk comfort level. And I’m certainly not advocating a “buy-and-hold” strategy of the kind found in pure index-tracking portfolios. Your portfolio managers typically will be active and will adjust weightings as allowed by the portfolio mandate to reflect their view of unfolding market conditions, up to a 100% cash allocation. But their job is to do it when warning signals begin flashing, before the market corrects or crashes in a wave of panic selling.

Consult with your qualified financial advisor before making any move to gut your portfolio entirely so late in the day just so you can hunker down with bags of cash and feel “safe.” In this case, it really makes sense to put “safety” last.

Watch Robyn Thompson on CTV’s Your Morning for more tips on beating the market fear factor.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.