Sat | Jun 23, 2018

Oran Hall | Low-risk investments won't give you overnight riches

Published:Sunday | June 10, 2018 | 12:00 AM

I am in possession of $40,000 liquid assets. My aim is to go back to school and start my studies, which require $500,000 a year. What are your low-risk recommendations that could get me back to school in the shortest possible time?

- Alex


I applaud you for wanting to go back to school. Education is a great investment. It can yield significant long-term, and sometimes, short-term, returns. So can financial investments, but it is important to understand the role of risk in investments.

A risky investment instrument is one that has a high level of volatility: its price tends to vary significantly. Conversely, the price of low risk investment instruments does not vary significantly. Because of this, there is little chance of losing the capital invested and little potential to make significant returns.

If we confine this response to the instruments in our local market, the low-risk instruments are the short-term income-generating instruments such as treasury bills and interest-bearing instruments such as repurchase agreements.

Longer-term interest-bearing instruments are low risk, too, but their prices generally respond inversely to changes in interest rates. The risk of losing a portion of the principal only arises if they are sold before they mature. If held to maturity, there is no loss of principal.

Ordinary stocks are more risky than short-term and long-term bonds, their prices rising and falling depending on market conditions. A comparison of the yields of these instruments would show most stocks recording significantly higher returns than bonds over the long term.

The market actually compensates investors who take high risk with high returns. But not all investors are able to tolerate the fluctuations in the prices of higher-risk instruments, especially considering that periods of declining prices can be relatively long.

The returns from higher risk, higher-yielding instruments do not come primarily from income such as dividends in the case of ordinary stocks, but from capital appreciation, which is due directly to the increase in the price of the asset. It is also significant that there may be short-term fluctuations, but significant returns tend to be made over the long term.

Diversification is one way to reduce the risk of an investment portfolio, meaning investing in several types of securities. Diversification is more effective if a portfolio is large enough to include a wide range of investment instruments. It is for this reason that I often recommend unit trusts for small investors because they allow such investors to participate in a large portfolio that is diversified, which allows them to reduce their risk and boost their returns.

It seems that you have $40,000 that you can invest readily, but you need $500,000 per year - I do not know for how long - to fund your noble goal of furthering your education. I have no clue regarding what you could do to get the required returns in the short term or in the long term, not to mention that you are interested in a low-risk solution.

By all means, press on to the mark of higher education, but consider other options for funding it. Have you considered studying while working? As hard as it sounds, many people have done that in the past, and many are doing it now, and many will in the future.

You could also consider deferring when you begin the start of your educational programme and build up some savings even if it means serious belt-tightening. This is not as unusual as it may appear.

Depending on what you want to do, you could identify an organisation that offers financial assistance to individuals desiring to be trained in areas that would have value to them or take a step-by-step approach by using one career as a ladder to another.

Let me share this with you. A week or so ago, a gentleman attending a meeting I was participating in and shared how his son first qualified as a nurse in pursuit of his goal of being a medical doctor - a goal he realised. Does it matter that it happened in the USA?

Borrowing is another option.

Today's world is a fast-track one, but I suggest that you take your time. You did not mention your age, but you can realise your goal, though not as quickly as you would want to, and, by the way, do not be tempted by any scheme that promises to give you phenomenal returns overnight.

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