Oran Hall | Financial advice for early saver
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: I saw your article about advice on personal financial planning, recently. I graduated from university and have been in the working world for two years now, I have accumulated $500,000 and have been wondering what would be the best financial advice in regard to my savings.
FINANCIAL ADVISER: I must commend you for beginning a savings programme and for seeking advice regarding how to proceed with a financial programme. If you save, you will be able to invest and realise at least some of your goals.
I am not able to say from the little information you have provided if you are doing your best at saving: you are saving about $20,000 per month, but there is no indication of what portion of your income this is. Nevertheless, you are saving and are doing much better than some of peers.
The challenge in addressing your situation is that there is no context. You have not said what your goals are and the timelines you have set for achieving them. You probably have not even given any serious thought to these matters.
To give you relevant and useful advice, it would be necessary to know more, and it would be best to spend some time with a competent financial adviser to look at your current situation, where you want to go and the options available to get there. It seems, though, that your primary concern is the investment strategy you should adopt.
You may want to determine what you want to achieve in the next five years and beyond in regard to such matters as career, education, family, acquisition of personal assets and accommodation.
When you have settled on these, you should be in a reasonably good position to say if you are saving at an acceptable level. You could find that you may need to save more than you are now doing.
It is possible that you could come to recognise that you need to generate higher levels of returns on your funds, but you would have to determine if you have the capacity and willingness to tolerate the attendant higher level of risks that this would require.
Markets and portfolios
Very important too, is what you know – about financial and investment instruments, for example. It is important to know about these matters to be able to understand the most suitable actions to take. I suggest you step up your reading and even consider taking a basic securities course. There are at least three available locally.
At some point, you will want to create an investment portfolio – one that is diversified. The portion of your funds that you put into specific types of investment instruments will be determined by the goals you have set and your objectives.
If you want to have liquidity, meaning easy access to cash, you could invest some of your funds in money market unit trusts, but their yields are not significant considering that they invest in short-term interest-earning instruments on which the returns are generally low. These returns are generally better than the banks are offering on fixed deposits.
You can also get liquidity from unit trusts that invest primarily for growth in the stock market and real estate. Capital growth would be the primary objective for investing in these instruments, but prices will fluctuate, reflecting the behaviour of the stocks, particularly if it is an equity fund.
You may, however, be able to identify unit trust funds that are more balanced in terms of the portion of their funds that they invest in both interest-bearing securities, stocks and real estate. Though liquid, it is best to consider them as long-term instruments for growth.
You can also invest directly in stocks but not until you have some understanding of what they are and how the market operates. For example, they are more risky and less liquid than bonds. This is for your own protection. You should not depend entirely on others to tell you what and when to buy and when to sell. Sure, the professionals should be more knowledgeable about these matters than you, but you should understand what is going on and why you are taking the decisions that you take.
There are more complex options available, but those are for later – when you have more knowledge and experience.
A critical role of the investment professional is that of advising how best to spread your money among the various investment options and thereby create a portfolio that is customised for you.
This option is not available from the unit trust. The managers determine how funds are distributed among the various asset classes and all unit holders in a particular fund have a share in the fund proportionate to the units they own in the fund.
The closest you can come to customising your unit trust investments is by investing in several types of funds. In this case, you can determine what portion of your money goes to a particular type of fund but that does not necessarily give the desired mix as some funds invest in more than one type of instrument. For example, capital growth funds may invest in bonds provided they do not exceed statutory limits.
You have taken a good first step – saving. Be patient as you move to translate your savings to investment and start working on the financial literacy aspect of the equation.
Oran A. Hall, the principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.