Financial Adviser | Investment options for a young university student
QUESTION: I am a 20-year-old university student who wants information on viable investment opportunities in which I can invest. Can you please assist me with information on how to go about doing that?
FINANCIAL ADVISER: I suggest that you approach the matter from the position of what your investment objectives are. Some primary investment objectives are capital growth/
inflation hedge, regular income, ease of management, liquidity, security of principal and hedge against exchange-rate risk. Consider also the level of risk you are able and willing to take and when you will need the proceeds. The returns would also be important to you.
It is quite likely that you are thinking about earning from the funds you have to help to meet your expenses during your course. In this case, you would focus, not so much on investment instruments, but on savings instruments. These are found primarily in the banking sector, but, at current rates, you have very little to earn.
You can choose short-term instruments issued by the Bank of Jamaica, such as Treasury Bills, which generally have maturities ranging from 30 to 365 days and are priced at a discount but mature at face value, thereby generating some income. Expect yields of 6 per cent or less per annum. You may be able to invest as little as $5,000 if you submit a tender to Bank of Jamaica at one of its auctions, or you may source them from a licensed securities dealer, but you may be required to have much more money.
COMATOSE BOND MARKET
Repurchase agreements commonly called repos pay interest when they mature at the end of 30, 90, 180 or 365 days, but you would need to have at least $1 million. The Government of Jamaica issues 'bonds' of various maturities, more than 20 years in some cases, but that market is not very vibrant now. Corporations also use bonds to raise money, but that market is comatose. Bonds generally pay interest twice yearly, so they are not suitable for persons who need income more regularly.
You may want to see your money grow and not be too concerned about income. If that is the case, stocks would be worth looking at. But you need to know that there is no certainty that your money is secure. Stock prices do not move only in one direction: they move up and they move down. And there are times when they are down for a long time. Ultimately, the price of a good stock does rise and substantially too in the long-term in many cases.
Investing in stocks takes time, as you need to devote time to research and analysis to determine which stocks suit you best and which promise good returns over the long term. Stock prices may rise and substantially, too, but when you make a commitment to this instrument, see it as a long-term one.
If you are not comfortable with the risk of investing directly in stocks but want to benefit from them, nonetheless, the door is still wide open through unit trusts. These investment instruments are really pooled funds whereby the fund managers use the money sourced from many unit holders to invest in a wide range of investment instruments.
The nature of the fund is determined by the type of instruments in which it invests such as bonds, equities, real estate or a combination of investment instruments. Some funds are identified by their investment objectives such as income or capital growth.
RISK AND ADVANTAGES
As these instruments are diversified, they facilitate the spreading of risk. They are also quite liquid as the unit trusts buy back the units readily in much the same way that they sell them readily. The price of those invested mostly in interest-earning securities tend to rise consistently, but the same cannot be said for those that invest in stocks. Some invest in several types of securities and tend to fluctuate less than those invested primarily in stocks.
Unit trusts offer a wide range of options as there are so many types of funds in our market today, which allows investors to reap benefits, not just from investments denominated in Jamaican currency, but in the US dollar.
An advantage that all unit trusts offer is ease of management as they are managed by professional managers, thus making it unnecessary for investors to spend time doing research on individual securities and making trading decisions. You do not have to invest large sums each time, but may opt to invest relatively small sums as they are available.
To start your investment programme, you need to make contact with a licensed securities dealer such as a stock broker or wealth manager/portfolio manager or, for unit trusts, one of the unit trusts. The Yellow Pages can assist you to find them.
Youth is a good place to start. You would be surprised to see how the value of your portfolio grows over time.
- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. Email firstname.lastname@example.org.