First let’s put things in the proper perspective:  Investors need to look at their actual investments not just the current dollar value of that investment.  For example, let’s say you purchased 15,000 shares of ABC inc. for $10 per share, and the share value dropped to $8 per share.  You might feel the urge to panic, thinking you have lost $30,000.   In reality, unless you sell your shares, you still have the 15,000 shares you started with.  Now to help you understand this important distinction let’s change the example:  If,  instead of purchasing 15,000 shares of a company, you purchased a home for $150,000 and the housing market dropped reducing the value of the home to $120,000, would you sell it?  If nothing in your life has changed, you probably would not.  You purchased the home for a number of reasons; the neighbourhood is nice, the foundation is strong, room to grow, solid investment for the future.  The fact that the housing market has dropped doesn’t change any of those factors.  Going back to our original example the same can be said of a quality investment.  You make it for a number of reasons, strong management, growth potential, established track record, and so on.  A downturn in the markets does not change any of those things. An investment that is quality in a bull market remains a quality investment in a bear market assuming nothing else has changed.

            Next, you need to ask yourself if there have been any significant changes in your life.  Have you had a change in your health, switched jobs, retired?  This is very important to look at because anytime there is a major change in your life you should sit down with your investment advisor to see how it affects your investment strategies and goals.  Your diversified portfolio is based on your personal goals and risk tolerance, if  there have been no major changes in your life there is no need for major changes to your investments.  When the only thing that has changed is the state of the markets then a decision to sell is quite likely based on emotion, and nothing causes more investment mistakes than emotion.

Finally, every wise investor should remember four basic principles to be successful:

1.   Don’t try to time the markets.

2.   Invest for the long term.

3.   Invest regularly for best results. See our article on monthly investing or meet with your advisor to see how regular investing can improve your returns in a volatile market. 

4.   Reduce risk through diversification. 

Low interest rates for GICs and high volatility in the markets have many investors searching for alternatives to traditional investments.  With so many people looking for competitive returns and low risk, attention is being focused on participating life insurance.

Participating life insurance provides a predetermined amount of coverage which is paid as a lump sum when the insured passes away, just like any other life insurance policy.  Where it differs from a non-participating policy is that it has a savings portion. This savings portion is made up of two parts:

·    A guaranteed cash value, which is exactly that; a guaranteed minimum value if you were to cancel the policy at a given time in the future.

·    A non-guaranteed cash value of dividends.  The dividend is affected by a number of variables such as investment returns, mortality experience, expenses and other relevant factors. 

The combination of these two values makes up your total cash value and can represent a competitive interest rate with a lower expectation of volatility.

            What kind of return can be reasonably expected from participating insurance? It depends on type of policy, age, length of time and a number of other factors, but here is an example:

 A 35 year old, non-smoking, male needs $150,000 of insurance for the next twenty years.  The quote he has received for a 10 year non-participating term insurance policy is $16.65/month, with a guaranteed renewal rate of $50.40/month.  The average cost over the next 20 years is $33.53/month. 

The same individual can purchase a participating policy for $98.98/month.  If you subtract the $33.53/month he would be paying for non-participating insurance, the additional $65.45/month can be viewed as a monthly investment.  After 20 years his projected total cash value is $30,030.  That translates into approximately 6% annual return on his investment.  It is important to note that this percentage is based on the sum of the guaranteed and non-guaranteed portions of the policy and is therefore only a projection.  Total returns on participating life insurance are not guaranteed, but they are generally less volatile than equity markets.

In the right situation, participating life insurance can bridge the gap between GICs and equity investments.  When deciding on participating insurance as an investment tool, some factors to consider are insurability, tax implications, timeline and affordability.  Sit down with your financial security advisor to see if this is an alternative that is suitable for you.