Financial Adviser | Post redundancy investment options
QUESTION: I was recently made redundant and I have a portion of money I wish to invest wisely. I currently own stocks in a few companies but I don't want to 'put all my eggs in one basket'. Can you advise of any other option I can consider?
FINANCIAL ADVISER: Diversification - spreading your risks - is much better than concentration - investing in one or few investment vehicles. In this, you are on a prudent course. It is also important to recognise the importance of putting in place a meaningful investment programme after a careful analysis of your situation.
I will make some suggestions to you but must emphasise that it is best to see a competent investment adviser who is prepared to look at your personal and financial situation as well as your goals and risk profile. Any investment decisions made should fit into your overall investment programme, including the instruments you now own.
In short, I expect that you will be guided into choosing an asset mix that is suitable to you and that the new investments made will fill any gaps uncovered in your portfolio.
All you have said about yourself is that you own some stocks, which suggests that you are not likely to be risk averse, and want to diversify your investment portfolio. I would not be surprised, though, if you do have other investments or own other financial assets, such as cash or money in the bank.
One downside of redundancy is that it causes so much uncertainty. You never know when you will return to earning employment income again and so that has to be factored into the decision you make. How deeply this will affect you depends on whether another member of your household or immediate family earns an income and whether you have dependents.
I write about the investment options available in our market quite often. You clearly know about stocks. As an investor, you have access to local stocks, Caribbean stocks and international stocks. You can diversify this part of your portfolio by buying stocks in several markets.
Pooled funds such as unit trusts and mutual funds also offer another option. These are classic examples of diversified instruments. They are easy to manage because their management is in the hands of professional investment managers and there are many different types, thereby giving much scope to develop a balanced portfolio. Their liquidity makes them quite attractive to investors who are faced with uncertainty.
The various income-bearing securities such as repurchase agreements, which are short term, and medium to long-term bonds, are more attractive than bank deposits. Only the repos are able to give you regular cash flow in the event that this is required.
There are other more sophisticated instruments which I would not recommend to persons who lack experience in investment matters.
One option that is sometimes overlooked is owning and operating a business. If the other forms of investment can be seen as being largely passive, this certainly cannot be so considered.
A business is capable of providing lifetime income and can be a good source of wealth-building. If all goes well, it can give you job security, independence, flexibility and greater control over your life.
You may opt to go alone as a sole proprietor or to join with others you can trust in a partnership. But there are risks inherent in either type of arrangement.
Redundancy has pushed several persons to start businesses that have turned out to be quite successful. On the other hand, others have not done as well.
You could consider turning some of your hobbies or part-time activities into a viable business. I know people who have done that with music and play-writing. I know others who have rediscovered old skills such as woodwork and others who have capitalised on what they know of the unmet needs of former clients to start businesses offering several valuable services.
In these cases, the new business people turned to activities that they love and have some expertise in. Could the same be true for you, and do you have the required capital to make the move? Would you be able to live at a level that just meets your basic needs in the initial phase of the business? If you do not have the required financial resources, would you be able to source them and meet debt servicing commitments? Are you confident that you have the requisite management skills?
Take time to reflect on the available options and seek help if you need to. I wish you well.
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.