Sun | Jun 17, 2018

Oran Hall | What to do with $100,000 inheritance

Published:Sunday | January 28, 2018 | 12:00 AM

QUESTION: I recently received a small inheritance valued at approximately $100,000. My first idea was to invest it as I seek to make this money grow now that I have had the good fortune to receive it. However, I would like to know what good options are out there for me to do this, especially considering that, though I won't need it right now, I believe that I may need the money at least five years from now when I have finally finished university. I know there are good options out there in the money market, stock market, etc, but none of them seem inherently better or worse than the others given my situation. I would just like to know what options are out there and what to look out for so that I can pick out the best options for my situation.

- Zoe

FINANCIAL ADVISER: There are several options in the market: stocks, money market securities, bonds, mutual funds and unit trusts. These are the more basic and common ones and, although most are local instruments, there are opportunities to invest in securities from other markets.

The instruments vary in several ways and are suitable for various situations as they satisfy several objectives including capital growth, income and protection against the value of the local currency depreciating. The choice you make will ultimately be determined by what you want.

Investing the small windfall is a smart move. Clarifying in your mind when you will likely need to use it is also a smart move as you should be better able to decide how to invest your funds.

Five years should give you reasonable time to invest and get a reasonable return even if there are market fluctuations and I do not doubt that these will present themselves.

If you want income such as is generated from money market instruments like treasury bills or Bank of Jamaica certificates of deposit, you should consider if the yield is enough to grow your funds sufficiently to achieve your goals in five years and you would not want to withdraw your interest as it is so important to allow the power of compounding to work.

Consider if there is certainty of income and security of principal, meaning whether you can recover your capital fully at maturity or by resale should that become necessary. Consider if you have the minimum sum required to make these investments. Consider if you have the time and expertise to manage your investment portfolio and whether the returns are taxable.

Long Term Savings Accounts are five-year instruments that yield tax-free income if the stipulated conditions are met, but they are not tradable although they generally include several types of money market securities. You would lose the tax-free benefit, for example, if you opted to withdraw more than 75 per cent of the interest earned in any year and if you opted to withdraw the funds less than five years after taking out the contract.

 

KEEP ABREAST OF DEVELOPMENTS

 

If you want capital growth, stocks are your best option but there are no guarantees. Are you likely to be able to liquidate your investment at the time you may require the funds considering that you can only sell if there is a buyer? Will you be able to make a profit when you are ready to sell? Is the company you choose to invest in known for consistently good earnings performance?

If you choose stocks trading in foreign markets, will you be able to keep current with what is happening to them? Consider that although you may be making long-term investments, it is necessary to keep abreast of developments as some developments may have far-reaching negative consequences, which may cause you to change your position in the security.

What level of protection against risk can you expect from a particular type of security? Would you prefer to invest in a pool of securities that would help you to spread your risk and not be wiped out by negative developments in the market?

There are two options that are useful in giving this kind of protection. Mutual funds represent one option but they are foreign-based and thus are denominated in foreign currencies. One significant advantage they offer is protection against the depreciation of the Jamaican dollar.

Unit trusts are similar to them and are also quite liquid and will free you from day-to-day management of your portfolio. They also invest in a wide range of securities in several combinations to meet a diverse range of objectives.

You would need to determine your objectives and see which ones match by looking closely at what they invest in, which determines how risky each is. Thereafter, examine their track record in terms of their yields and consistency.

This is an awful lot to consider but you need to take time to determine what suits you best - and some options are inherently better, or worse, than others. It all depends on what you want to achieve.

- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com