Hopeton Morrison, Contributor
SEVERAL READERS wrote to us last week. This week we respond to three of them:
"I am thinking of investing in a tax-free investment account (at a named financial institution). I worked as a housekeeper so I need some honest advice.
The deposit is $100,000 at 15 per cent fixed interest rate. I would have to maintain the deposit for five years. I would only be able to withdraw 75 per cent of the interest quarterly. It also says that 100 per cent of the primary investment is returned.
Is this a good choice for someone who does not have money? One of the reasons why I want to invest is that I am unmarried, no children and in my mid-forties and I am thinking of 10 years down the road. I would appreciate it very much if you could take the time to give me some advice".
RESPONSIBLE ATTITUDE
First I wish to commend you for your responsible attitude to money. I am assuming that you are still working. Anyway I contacted an account executive at the institution that you identified. What you are being offered is known as a "Long Term Savings Account" (LSA). It is a good choice of investment at this time for the following reasons:
I am assuming that the rate of interest of 15 per cent is fixed for at least five years. You need to make sure of this fact. You will however hardly get a better rate on an investment of this type anywhere else.
You can have your interest credited to your principal balance anywhere between every 90 days and one year. I would recommend that you go for a quarterly transfer of interest to principal balance and that you do not withdraw any interest at all. Once you do that you are engaging in one of the best known tools of wealth creation, compounding.
The art to compounding is to have interest credited to principal as often as possible. The truth is however that a $100,000 investment in a LSA is not enough to take care of your needs in retirement. You do need to build up some type of a pension for yourself.
There is quite a bit of personal information that we would still need to have. Do you own a house for yourself for example? If you don't do you wish to? That would put an entirely different picture on your investment needs at this time.
OLD AGE PENSION
As much as children in Jamaica can hardly be seen as "old age pension" any more they do offer some sense of security. It means then that you need to become a bit more aggressive in your investment plans to compensate for the absence of children. You could easily find yourself living for another 40 years or more which would take you into your 80s and beyond.
Are you in a position to maintain yourself for those 40 years if you were forced to stop working now? I would think that you would also need an insurance product that guarantees payment of a savings goal that you decide on to maintain you if you were to become permanently disabled or down the road when you need money for your retirement.
Look at the (so-called) Banc Assurance products, Omni (NCB), Golden Harvest (credit unions) or ScotiaMint (Scotia-bank) which set goals with you towards a fixed period of time in the future.
INDEPENDENT ADVISER
Really though you need to sit preferably with an independent adviser, (one who is not attached to any of the investment houses around and thus not biased in her product recommendations) and set a plan for the next 15-20 years of your working life.
In that plan I believe you need to have a balanced (that means a mix of stocks and other assets) mutual fund or unit trust somewhere there as fixed income instruments (e.g. LSA) will not ensure that you can retire with any great sense of financial independence.
As difficult as things might be on your limited salary now, make the sacrifices now that you are still able to work. Those sacrifices will be rewarded at that point in your life when you are no longer able to work for your money and your money will have to work for you.
A female reader writes:
"I read your article in the Sunday Gleaner and I would like your advice on my particular situation.
I have $10,000 that I can invest each month. I would like to take that money and invest it directly on the Stock Exchange. I would buy Grace this month, NCB next month, C&W the following month and so on. I thought that I would buy about 15 stocks to build my portfolio over the next 15 months.
I am 30 years old and I want to have this money put away for the next five years to grow and be there as a financial cushion. Of course, I intend to watch the market for a bubble and move my funds out if necessary. But I feel that at this time in my life I should participate in the market directly. What do you think of this?"
To be perfectly honest with you I think it is a great idea. But there are some considerations that you should bear in mind:
At 30, you can take major risks because you are young and able to bounce back from any fallout in your portfolio.
When you go into the market in this manner however it is important to choose your broker carefully. There are 10 brokerages in Jamaica at this time.
There is also a potpourri of rates out there. Some charge a flat fee of $500 or $1,000 per trade. Some may take a charge up to a minimum trade, say $20,000 and trades above that you are charged a percentage. Some go with a percentage of all trades.
What we know though is that there are some brokers especially the more recent entrants in the trade who charge a minimum fee for trades in an effort to build volume and market share. Because these fees ultimately figure in your Return on Investment (ROI) try to find one that gives you a prudent mix of solid investment advice and at the same time does not compromise your ROI.
The method of investment that you refer to is called "Dollar Cost Averaging" and is a proven method of investing in the market. By investing the same dollar amount on a monthly (or quarterly etc.) basis, rather than seeking to buy a specific number of shares, you end up buying more shares when stock prices are at a low and alternately fewer when the prices are at a high.
The result of all of this is that you average out the highs and the lows of stock prices. The general result of this is that you buy more shares when the price is low and naturally fewer when prices are high. You end up playing the market in such a way that you become as it were a 'player for all seasons' and as a result leave sentiments and emotions out of the mix.
In all of this though it is crucial that you are also diversified somewhat into some other asset classes. Remember that prudent investment speaks to three conditions: Risk, Return and Liquidity. We have already agreed that you are young and can take substantial risks now. Naturally the higher the risk the greater your returns or losses.
But what of liquidity? Are you going to need funds for a house, car, your (or your child's) education, any time soon? If the answer to any of the above is yes, then you probably need to fix some funds in a one to five year instrument such as a LSA. Always seek to maximise your tax breaks as that adds an automatic 25 per cent to your ROI. Also, it would not hurt to put a limited amount of money (perhaps one tenth of your monthly investments) into a hard currency (US$) account.
Another reader writes:"I am curious about investment (stocks and real estate). I have little idea about both and would like to get as much information as possible. I have tried but with very little success seeing that I am from St. Elizabeth. The library has very little and the bookshops down here are limited. If you could send a list and location I could get them."
There is a lot of information coming through the media these days. The Financial Gleaner on a Friday, the Gleaner's Wednesday Business and the Wednesday Business Observer, and the Business pages of the Sunday Gleaner are all very good for you.
There is the Business Day with Owen James on TVJ and the Business Report on CVM. If you can access cable there is CNBC, CNNFN, Bloomberg Television, and others. Then there is also the Internet with all those names mentioned above on cable in addition to such others as Forbes, Fortune, Business Week, Wall Street Journal, Kiplinger's, and a whole host of others.John Jackson publishes his Investors Choice magazine monthly. This magazine does a rather good job of tracking the local equities market and you can subscribe to that. In addition, nearly all of the local brokerages and financial houses have newsletters that they send by regular mail or e-mail on request. Finally, you can check Novelty Trading Company on Hanover Street for the range of financial books that they have.
I can recommend a couple of good financial books including the following all of which I purchased here in Jamaica (most bought in by Novelty Trading Co):The Millionaire Next Door by Thomas Stanley and William Danko.Rich Dad, Poor Dad by Robert Kiysaki with Sharon Lechter.Charles Schwab's Guide to Financial Independence.Take on the Street by Arthur Levitt.One up on Wall Street by Peter Lynch.The Wall Street Journal Guides to: Understanding Money and Investing; Planning for Retirement; Understand-ing Personal Finance.
Please send comments and questions to: hmorrison@stccu.com Hopeton Morrison is general manager of St. Thomas Cooperative Credit Union Ltd. and lecturer at the University of Technology's School of Business Administration.
