Oran A. Hall
Question: I joined a partner plan that ends this October. I joined more so to prove to myself that I was disciplined enough to save, rather than for the lump sum of cash one receives with a draw. My goals for the money (J$8,000/month) now are to put it into a retirement account and a college savings account for my less than one-year-old daughter. I am under 25 and would like your advice on the best savings tool for a long-term savings goal, that is, one that I won't touch for another 18 years. Should I explore a credit union/mutual funds, etc?
FINANCIAL ADVISER: I admire your prudential approach to managing your future and that of your child. Having satisfied yourself that you have the discipline to save, I urge you to maintain that discipline and to consider life insurance as an element of your programme.
Both of your goals are long term so you need not be distracted by short-term instruments. You need to balance safety of principal with growth, and to retain as much as you can from your investment returns so it is important to pay attention to tax efficiency as well. Further, you should consider how much time you have to pay attention to your investments and your level of investment-management expertise.
You mentioned mutual funds and the credit union, but I am not sure what you have in mind regarding the credit union. I have no hesitation in recommending mutual funds and unit trusts, particularly to persons who have limited investment experience, limited funds, and limited time to manage their portfolio.
This approach allows investors to benefit from professional fund management and investment instruments that only those with deep-enough pockets can afford.
Our unit trusts invest primarily in Jamaican securities so there is not much protection against the local currency losing its value, but investing in mutual funds takes care of that problem. The diversified portfolios both provide a means of risk reduction and you do not need a large sum of money. You have to be careful, though, that you do not fall into the trap of redeeming your investment because both instruments are very liquid.
You can take a balanced approach by investing in balanced funds or by buying both growth funds and more conservative funds.
There is a fairly wide range of both types of instrument so there are options to build a diversified portfolio. I would suggest that you take a more conservative stance with the portfolio that you set up for the benefit of your daughter than with yours.
The beauty of starting early is that the value of your portfolio can grow significantly although the amounts you invest might not necessarily be large, but you should remember that those funds that you invest for growth will decline in value when market conditions are weak.
On the other hand, unit trusts generate tax-free returns. Even the money-market funds do so if you maintain your investment for the statutory five years. Based on your plans, that should not be a problem for you.
You have not said if you have any formal pension arrangement in place. If you are not now subscribing to a superannuation fund, you can put your retirement plans in place by participating in an approved retirement scheme.
These formal pension arrangements have good benefits. The portion of your income that you contribute to them is not taxed, they earn tax-free investment income and the funds are invested by professional investment managers, but your pension will be taxed.
Life insurance serves a useful purpose. It gives coverage so your beneficiary can be provided for in the event of your premature death. Persons who have children need to make it an important part of their personal financial plan.
Term insurance is relatively cheap, but it only offers coverage, no cash or investment values. Other types of life insurance do offer those and they can prove helpful in providing funds to assist with education and retirement income.
The partner plan was a good introduction to saving, but it is short term and earns you no income or capital gains. It is not the same as a long-term investment programme which can give those benefits but which requires more discipline.
I encourage you to start your programme without delay and to stick to it.
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. firstname.lastname@example.org