I am 34 years old and I would like to know the best option to beat inflation in the long term. I have tried a lot of products from the banks and the returns don't really make sense. I need some advice.
FINANCIAL ADVISER: It is important to at least keep on level terms with inflation to maintain your purchasing power and standard of living so you are looking in the right direction.
You are right too in your observation that the products offered by the banks will not stand up to inflation.
It must be clear that opting for a safe investment will not help if you want a real return. By safe investment, I mean one that guarantees paying back at least the amount of money originally invested.
For your investment to make sense, it must also give a total return that exceeds the rate of inflation and, if taxes are paid, to yield a real return after taxes.
To counter purchasing power risk, you need an investment with growth potential, which will allow your capital to increase in value. As a bonus, it would be good if it also gives you some income in the form of interest, divided or rent.
In our market, the investment vehicles which offer the best protection against inflation are real estate, blue-chip stocks, growth unit trusts and growth mutual funds. To a lesser extent, balanced unit trusts and mutual funds also offer that protection.
But, there is a downside. All of these investment vehicles, including real estate, can potentially lose value. In fact, you no doubt have seen that happen in our market. I like the fact that you have put your question in a long-term context.
You see, there will be market fluctuations from time to time but, over the long term, 10 years or longer, it has been proven that ordinary stock, in particular, has yielded a return that exceeds inflation.
It is true that the local stock market has not been at its best for some time, but rest assured that it will rebound, and strongly too, as we have seen it do in the past.
The key to investing in the stock and unit trust markets, to the extent that you have funds that you can put away for a long time, is to invest systematically.
You may invest small amounts regularly so you will get some good prices, and bad prices too, but overall you should have a reasonable average cost. Bear in mind that you have the option of investing in markets outside of Jamaica. This is a good way to reduce your risk.
The attitude to adopt when investing for growth is to keep a level head. If you are prone to panic or worry when prices fall, investing for growth is not for you.
The sad reality is that, if you want security of principal, you should be prepared to be beaten by inflation.
If you want to beat inflation, you should be prepared to tolerate market fluctuations.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning.Send feedback to email@example.com