The ABCs of investing
Oran Hall, Personal Financial Adviser
QUESTION: I just started working and would like to know the ABCs of investing. What is the minimum amount of money I would need to start a low-risk investment with maximum returns? Can you please explain in detail what I could start with $100,000?
Recently, I wrote that one way to secure financial independence is to start saving and investing early. You have decided to start investing early. This is commendable.
There are several basic investment principles I will share with you. First, know where you are now, where you want to be, that is, your goal, and the time within which you want to achieve it so that you can determine how much to invest and the returns that you need to generate from your investments. You should also be disciplined and stick to your plan.
Diversify your investments. Markets are unpredictable and therefore fraught with risk. Spreading your risks will help you cushion losses in unfavourable market conditions. Diversification will also allow you to earn different kinds of income to meet your objectives and strengthen your portfolio.
Have a savings plan and execute it well so that you can have the financial resources you will require to fund your investment programme. Having a pool of savings will put you in a position to take advantage of investment opportunities when they arise.
Preserve the wealth you generate. Be prepared to accumulate wealth slowly and avoid speculation. Avoid instruments and programmes you are not familiar with, and do all you can to educate yourself about investment matters. Beware of tips, so-called insider information and schemes that promise quick returns.
Seek sound financial advice when necessary and ask meaningful questions. Do not leave your decisions to others. Research and do your own homework.
Remind yourself that investing is a long-term matter, so be prepared for a long ride. Nonetheless, be prepared to ditch investments that are not working out. Avoid falling in love with your investments and recognise that you will suffer some losses. Take them and move on to the next opportunity.
To satisfy yourself that your investments remain in line with your goals and are meeting your objectives, do periodic appraisals of your portfolio, perhaps on an annual basis, and make changes if they are deemed necessary.
Generally, investing suggests increasing the value of the capital outlaid, but it also suggests risking depreciation in its value. Low-risk instruments by nature tend to give relatively low returns, but a diversified portfolio can effectively reduce your exposure to risk and enhance your prospects for a better return.
I would not recommend stocks for a small and inexperienced investor, particularly one who wants low-risk instruments. Similarly, real estate would definitely not be an option, but real estate investment trusts could become more visible in our market in a few years.
Interest-bearing instruments are generally quite safe, particularly the short-term ones, but they hardly qualify as investment instruments. In a sense, though, the longer-term instruments do have prospects for gains or losses depending on the movement of interest rates.
Inevitably, I recommend unit trusts for people like you because they do not generally require large sums; one unit trust sells as few as one hundred units so your $100,000 is more than adequate to make a start.
Additionally, unit trusts are professionally managed, are quite liquid, facilitate diversification either due to the wide range of instruments in which each fund invests or the opportunity for investors to invest in several of them in building a portfolio.
You should note that funds that have capital growth as their primary objective are potentially quite risky.
The following companies own and operate unit trusts: Barita Investments, Jamaica Money Market Brokers, NCB Capital Markets, Sagicor Investments and Scotia Investments. In your research, you will find that there is significant variation among them. Learning about them should help you learn about other investment instruments.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free personal financial planning advice and firstname.lastname@example.org