Thu | Jan 17, 2019

Oran Hall | Investing a lump sum for retirement

Published:Sunday | February 25, 2018 | 12:00 AM

QUESTION: I would like to find out what my best options are as it relates to investing a lump sum towards my retirement. I am 45 years old, female with one dependent. I like to take moderate risk. Please advise as I am not knowledgeable in this field.

- Angella

FINANCIAL ADVISER: You have a good 20 years to retirement and have declared that you like to take moderate risk but are not knowledgeable about investments, which suggests you have ruled out some options.

Stocks are really best for the long term as they generally give good returns notwithstanding the swings of the market. Bonds do not generally give the same level of returns but hold their nominal value up to maturity so they are not what you would want as a self-described moderate risk taker.

It does not seem that you are thinking of actively investing your lump sum and you would need time to get the required knowledge to handle the management of your lump sum.

The instrument that comes to mind that you could leave to grow over time without much input from you and which could readily match your moderate risk profile is a unit trust fund that balances growth with safety of principal.

Such a unit trust fund would likely be invested in stocks, or stocks and real estate for growth, and long term and short term debt instruments for long term safety of principal and for income which would be reinvested. Some unit trusts have labelled these as capital growth funds.

By looking at the Financial Gleaner published on a Friday, you will see the funds which invest in equities and fixed income securities and those which invest in equities, fixed income and real estate by looking under the fund composition column of the "Unit Trust Funds" report. Some are denominated in Jamaican dollars and some are US dollar-denominated.

As soon as you have identified them, spend some time researching them. Some of them have been around for many years so you should be able to get some insight into their track record by getting some information on past performance. The Gleaner report gives information only on the performance of the last 12 months.

It would be useful also to see the composition of the funds in terms of the proportion that is in equities, fixed income and real estate as the case may be. Ask the unit trust for that information. These ratios change due to new investments being made and the changing rates at which the assets appreciate, but I would opt for one that is not skewed too heavily to equities, or to real estate to a lesser degree to align with a moderate risk profile.

Bear in mind that past performance does not necessarily guarantee future performance but it is useful, nonetheless, in assessing consistency.

These funds do not give the steady returns of money market funds and bond funds but give steadier returns than equity funds, which tend to give very good returns when the stock market is booming but perform abysmally when the market experiences a downturn.

Your long time horizon means you should be able to ride out periods of lack lustre performance so you need not panic when such periods come.

One advantage of going this route is that the management of the funds is in the hands of professional managers so you basically take a hands-off approach to the management of your portfolio. You need not add to the lump sum though it makes sense if you are able to, but you should resist the temptation to encroach if retirement is what you want those funds for. Another benefit of this approach is the tax-advantaged status of such funds although this benefit is not unique to them.

If the funds seem heavily weighted in favour of assets meant for capital appreciation - equities and real estate, individually or jointly - you could reduce the risk of your portfolio by opting to invest some of your lump sum in one of those funds and the rest in one of the fixed income funds so that, to begin, you could have 50 per cent to 60 per cent of your lump sum invested for growth and the rest for preservation of capital.

I am a little curious, though. How did you determine that you "like to take moderate risk" considering your admission that you are "not knowledgeable in this field", which I conclude is the investment field? Did you complete a risk assessment questionnaire or take note of the financial instruments that you are naturally attracted to and feel comfortable with?

I suggest you seek further guidance from a qualified and licensed investment professional before taking action.

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