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Financial Adviser | How a first-time investor gets in the game

Published:Friday | November 27, 2015 | 3:38 PMOran Hall

QUESTION: I was just reading several of your articles on The Gleaner website, and it interests me greatly to know what I can achieve by investing on my meagre salary. Your advice will be appreciated as I need to do something substantial and worthwhile with my life with my little bit of money. The questions I have for you are: What is my first step towards making a sensible investment? What type of investment should I make? Which of these investment funds or trusts would be more suitable for first-time investors?

- Alicia


FINANCIAL ADVISER: I addressed a similar question last week. It is encouraging that there seems to be growing interest in investing and especially by persons who do not have significant financial resources.

Because a columnist does not usually have much information on the personal and financial circumstances, risk profile, liquidity, and capital needs and goals of a reader, it is quite challenging to give specific advice that will always be suitable for the reader.

The suggestions I offer should, nonetheless, be helpful in guiding you when you have a discussion with an investment dealer or dealer representative. Nowadays, the form completed by new clients is used to capture meaningful personal and financial information on them. Generally, too, it captures information that can assist in determining their risk profile.

A serious investment professional is expected to have a meaningful discussion with you to go beyond what has been captured on the form and to allow you to ask questions of your own. When a clear profile of you has emerged, the investment professional should be able to offer suggestions, which you should weigh and then make a decision.

You should be very clear about why you are making a particular decision as this will help you to maintain focus and keep a level head if changes occur in the market or your circumstances.

Your first step, then, is to know yourself: your circumstances, attitude to risk, what you want to achieve and why; what you know about the market and the instruments; and when you are likely to need the invested funds for the goals you have set.

It is important that any investment you make is suitable for you. This does not necessarily mean for you only, for if you have a family, your investment programme would almost

certainly take the needs of the family into account. If, for example, you have children, you would take the funding of their education into consideration.

In your second question, you ask what type of investment you should make. You then seem to answer that question in the third question, where you ask which investment trust or fund is suitable for first-time investors. It seems to me that you have a preference for unit trusts, or mutual funds, or both.

Frankly, I believe that first-time investors have much to gain from using these instruments as the initial pathway to the investment market. These are some of my reasons for saying so: They allow the spreading of risk through diversification; they offer significant choices because there are so many different types in terms of their make-up; they are professionally managed; and they require no significant outlay of funds.

My major reservation is that their liquidity, while being useful in some circumstances, may make it too easy for the less disciplined investor to abort or disturb an investment programme.

As a first-time investor, you need not be wedded to low-risk options because of newness to the market. If you are able to take risk because it is in your make-up to do so or because you have a long time horizon, for example, you need not confine yourself to low-risk funds such as money-market funds.

In fact, one reason these pooled funds are appealing is that being diversified, the risk to which they expose the investor is lower than the risk of individual securities. Bear in mind, too, that if you want strong above-average returns, the instruments best able to generate them are the more risky ones which, by the way, are the ones most likely to ravage your investment yields.

There are more than 30 unit trust funds available from five companies of which to choose. For a discussion of the various types of such funds on the local market, you may read my column of May 5, 2015: "Do unit trust funds offer real options?"

At the end of the day, Alicia, considering your apparent preference for unit trusts or mutual funds, the choices you make will depend on the level and consistency of growth you want from your portfolio and how it is to be generated, that is, by interest income, changes in currency values, appreciation in the value of stock, real estate, and other securities, or by a combination of any of the foregoing.

A single fund may be able to meet your goals and objectives, but there are sufficient options to allow you to invest in several funds.


Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.