Oran Hall | The right strategy for a twentysomething investor
QUESTION: I am 24 years old and currently living and working in Kingston with a salary of US$2,000 per month. I want to invest. What do you recommend for me monthly?
FINANCIAL ADVISER: It is good that you want to start investing at a young age. This approach will help you achieve what you want to with less pressure. No serious adviser,however, can make suitable recommendations to you without first getting more information about you.
In this the early career phase of your life cycle, you will experience many firsts - first job, marriage, home, business. Many young people find this a very challenging period generally because so much is required to establish a good foundation at a time when income is limited and the capacity to borrow is limited and there is little to invest.
This is also a period during which liquid resources are required for emergencies particularly if a new family is being established and savings must be generated to provide the resources required to make investments and purchase personal assets.
Generally, this is a period to invest for growth with caution, to save to generate income and liquidity, to earn tax-free or tax-deferred income, and to diversify to manage risk. This is the first period of accumulation both in terms of investing and in terms of personal assets.
How much should I invest?
You want to know what is to be recommended for you, monthly. It appears that you want to know how much you should invest each month more than what you should invest in each month.
I suggest that you first chart a plan outlining what you want to achieve over time. Do a close examination of your income and expenses and then decide how much you need to save and invest each month.
That done you can then determine your investment programme including your asset allocation and then select the instruments that best suit you.
If you do not feel that you are able at this stage to determine your asset allocation or asset mix and the securities that are appropriate, you should see a licensed and competent investment adviser but you must know what you want to achieve and how much you can invest periodically to be able to get advice that is relevant to you.
In preparing to meet an adviser, I suggest that you become familiar with some of the terms and instruments that are common to the investment business so you can have a meaningful discussion, which includes asking valuable questions and understanding what is said to you.
Some of the terms you should find useful are asset allocation, diversification, risk, stocks, unit trusts, and bonds.
Asset allocation is the process of allocating funds among the different types of securities: stocks, bonds, unit trusts, for example. What percentage of funds is allocated to particular types of securities determines the potential of the portfolio to generate capital growth or income. It is what determines ultimately how well a portfolio - a group of investment securities - does and should be long term and thus not be changed in panic when market conditions change.
Diversification is investing in several classes of securities and securities. It is the best way to spread risk and protect a portfolio from fluctuations in the market.
Risk refers to the variability of returns. Investment returns do not always meet expectations. Sometimes they are negative. Other times, they are less than expected. Some securities give more certain returns than others. These are known as low risk investment instruments. On the other hand, others are classified as medium risk or high risk.
Risk averse inverse investors prefer low risk investment instruments. Risk takers tend to be attracted to high risk instruments. But balance is very important in building and maintaining an investment portfolio.
Stocks are securities which represent ownership in companies. Investors earn income from dividends which are usually paid when the company makes a profit but dividends are not guaranteed and are usually low. The highest level of returns comes from the price of the stock appreciating on the stock market, but stock prices also decline.
Unit trusts are investment trusts which pool and invest the money of unit holders in a wide range of investment instruments. They buy back the units readily thereby making them quite liquid and cater to investors with a wide range of investment objectives. They are managed by professional investment managers and are very suitable for inexperienced investors and those having little time to manage their portfolios.
Bonds are debt instruments often paying a fixed rate of interest. But their returns may not be sufficient to give a positive return after taking inflation into account. An alternative to them is the unit trust preferably money market funds and fixed income funds.
When you do invest, use funds that you can afford to put aside for the long term.
- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. firstname.lastname@example.org