Tue | May 30, 2017

Making the right saving decisions

Published:Sunday | June 14, 2015 | 6:00 AM

QUESTION: I am having difficulties deciding how to diversify my savings. I currently have two mutual fund portfolios, one of which I no longer make regular instalments to, and I also hold a US dollar account. I have surpassed my target of putting away six months' salary. I do not wish to disturb the funds in those mutual fund accounts. I would, however, like to start allocating more of my savings for a Masters programme I intend to start in two years. I am trying not to keep all my eggs in one basket. How would you advise that I go about this specific goal?

- A. Henry

FINANCIAL ADVISOR: You are doing several things right, but there are some gaps in what you have outlined. Nevertheless, it is encouraging that you do have a plan and are interested in making it more effective.

Diversification is a very important element of any savings or investment programme. It is a critical risk-management tool, which may also boost investment returns.

You have opted to invest in mutual funds, which are quite liquid investment instruments and which, by their very nature, are probably the best vehicles for achieving diversification.

The fact that there are no Jamaican mutual funds suggests that you have opted to invest in instruments that are not denominated in Jamaican dollars. The benefit of this is that you are able to protect the value of your investments against the weak Jamaican dollar.

You have also set a target. It is important to set investment and savings goals to provide direction to your investment programme. Putting aside a sum equivalent to six months' salary is quite positive as it will provide a good cushion in the event of loss of income due to unemployment or illness.

The above notwithstanding, it is interesting that you have indicated that you do not wish to disturb your mutual fund investments. You clearly appreciate the need to take a long-term view of investments.

If your intention is to study abroad or to pay for your course in foreign currency, even if you are based in Jamaica, your focus on investing in instruments denominated in foreign currencies makes eminent sense.

Although you have stated that you have invested in two mutual funds, you have not said much more. I do not know if these are capital growth funds, blended funds or income funds, for example.

You have not said in which currencies those funds are invested nor what proportion of your portfolio is in mutual funds as against your USD account.

If, as you said, you do not intend to disturb your mutual fund accounts, you have a relatively short time to save for your master's degree, but, if you have funds you have not mentioned, you should have less pressure in building up your resources for that goal.

It would seem, nevertheless, that the funds that you normally would have invested in one of the funds would be available to save to realise that goal.

You have not indicated if you intend to work while studying or given any indication of what portion of the funds required for your course has already been secured.

It is critical to determine what your course will cost and what portion of it you have now in order to determine how much more you need to have to be able to fund it.

That would be useful in determining how much to save or invest and at what rate of return. You need to consider also that the relatively short time that is available to secure those funds leaves little room for error.

If you are well short of your requirement, the temptation could be quite strong to take a more aggressive stance, but the reality is that such an approach would not be prudent as you could literally lose some of your investment.

Even with their liquidity, capital growth mutual funds could cause challenges for you if their price declines just at the time that you need funds.

With this in mind, your ability to diversify your portfolio could be limited in the sense that you would be best advised to build a relatively safe portfolio, meaning one that is not skewed to capital growth funds.

You should really examine how well each fund has done so far and how your savings account has done too.

Look also at the performance of other funds from other markets, if possible, and get some assistance, if necessary, to assess if what you have are serving your interests well. If they do not fit, it could make sense to switch to more suitable funds.

With the limited knowledge that I have of your portfolio, I am not able to be specific about what to recommend, but I believe you have some pointers which can guide you when you discuss this important matter with a qualified and competent investment adviser.

In fact, getting the opinion of advisers from two companies should not hurt unless they are poles apart on how they see the best solution to your situation. I wish you well.

n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.