Financial Adviser | Wading into the foreign exchange market
QUESTION: I want to invest, but I am not certain where to start. My friend informed me about the foreign-exchange market. While it looks appealing, I would rather invest in something that would give me a good return on my investment at a moderate to safe level of risk without my involvement. What would be your advice on forex and this scenario?
FINANCIAL ADVISER: In investments, it is best to begin by determining what your goals and objectives are. You have stated that you want a good return, that you want to take low to moderate risk, and that you do not want to be involved, that is, you want ease of management.
To the extent that you would consider buying and selling foreign exchange to profit from price fluctuations, this would not fit the profile you have given as you would have to be actively involved in the process.
Further, although we have come to expect a one-dimensional movement in the price of our currency, the risk of loss is still real. Of course, you could consider buying foreign exchange and holding it indefinitely, but you do not seem to be keen on using currency as a means to make money.
But there is another option: you could buy assets denominated in foreign currency. Two available options are mutual funds and unit trusts that invest in foreign assets. Another less obvious option is investing in listed regional and local companies, which are net or even significant earners of hard currency, but that would not fit your stated risk profile and there are not many of those.
Mutual funds and unit trusts fit your objectives well. More than any other investment instrument, they facilitate ease of management as that is done by professional fund managers. As the investor, you do not get involved.
Because there are so many different types with the scope to match the various risk types, you could identify one or more that would be suitable for you.
At the more conservative or risk averse level are money market funds. Long-term bond funds would likely give higher returns, but with more price volatility. In any event, I doubt interest rates would fluctuate so much to cause serious price volatility.
If by moderate risk you mean that you do not mind some limited exposure to ordinary stock, you could consider mixed or blended funds which include securities such as bonds, equities and real estate.
With regard to your objective to get a good return, mutual funds and unit trusts have the potential to deliver. The higher the return you want, the greater the risk of the type you choose, and, if you are not happy with the performance of the funds you have chosen and want to switch, their liquidity makes it easy to do so.
One big advantage of these pooled investment funds is their level of diversification, which is an effective means of spreading and reducing risk. If you prefer to stay away from investment instruments denominated in foreign currency or which have some foreign-currency exposure, the local unit-trust market has a wide range of options for you.
I cannot guarantee that investing directly in foreign currency or in foreign currency-denominated securities or in Jamaican securities, for that matter, will yield returns that you may consider satisfactory. What I can say, though, is that there are several options available to you.
Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.