Wed | Nov 21, 2018

Oran Hall | Where to start building wealth

Published:Sunday | May 20, 2018 | 12:00 AM

QUESTION: I am 23 years of age and I am trying to build my wealth by investing; however, I am not sure where to start or where the best start for me is. I currently have a Sagi-Gold Accumulator policy but from my understanding, this is more of a long-term investment. I would really appreciate your advice.

- Shan

FINANCIAL ADVISER: Investing, in whatever form you choose, is the way to build wealth. Life insurance is one means by which you can build wealth for yourself and your family, and it is a very effective way to give your family financial security and lay the foundation to grow the wealth of your family in the event of your premature death.

Whatever means you choose to invest to build and grow your wealth, let us establish without delay that it takes time to build wealth. Investing is a long-term matter. It requires time and patience. It brings joy and it brings disappointment, so let us be very clear about what to expect.

Some life insurance policies have a strong investment component, but it is generally the policy holder who takes the risk. A portion of the premium is invested in one or more investment funds. Like unit trusts and mutual funds, the investments are managed by professionals, and risk is reduced by diversification. The policy you refer to is an investment plan, so a much higher portion of the premiums is invested than in the case of some other types of insurance products.

Although withdrawals are allowed in this case and others, it is not advisable to get into the habit of withdrawing funds from this or other types of insurance products. How does your portfolio grow when there are withdrawals? One other reason why it is not advisable to withdraw funds from these products is that the gains made are not taxable.

So, yes, investing is long term. You should structure your portfolio in such a way that you have funds to meet your short-term requirements and thus remove the need to encroach on your portfolio. Additionally, the funds you invest should not be funds that you would normally need to take care of your recurrent expenses.

One serious fact to remember when insurance is used as a means of creating wealth is that unlike other vehicles such as stock or unit trusts, which do not require ongoing inputs of new funds, insurance requires that premiums are paid on time and for the life of the policy as failure to do so raises the likelihood of the policy lapsing.

By all means, keep your policy, and as hard as it may be for you to accept, recognise that it is a long-term product. Depending on how the funds are distributed among investment instruments, the value will fluctuate. Expect the returns to be lower if there is little fluctuation. Expect them to be higher in the long term if they fluctuate as this would mean that the underlying instruments have a strong capacity for capital appreciation.

It does not seem that you are at the point where you can make your own investment decisions. I suggest that you have a serious discussion with an investment adviser who is able to assess your situation and make recommendations that are suitable for you.

Before doing so, make some effort to understand the various types of investment instruments. This means that the first investment you should make is time. Use it well to learn as much as you can, then start slowly with guidance from your adviser.

Be clear about what you want to achieve and when, and decide how much you can invest realistically over time. It is clear to me that like so many other young people who write to me, you are in a hurry to achieve, and the pressure to do so, no doubt, is strong.

At 23, you are still young, which means that you have time to recover from mistakes, but it is better not to set yourself back by being too hasty. However you proceed from here, have a diversified portfolio. You can put your funds into more than one type of investment instrument, or you can invest in one or more unit trust funds.

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