Fri | Nov 24, 2017

Oran Hall | Finding suitable investment options

Published:Sunday | October 22, 2017 | 12:00 AM

QUESTION:

I am seeking your advice or recommendation about what investment option would suit me. I am 36 years old and I am interested in a long-term investment. I would refer to myself as a low-risk investor. I have tried fixed deposits and am currently trying equity investment. But I am still unsure if these are the best options for me. If I have $100,000 to $200,000 with a monthly deposit option, what would you recommend, and do you think equity is a good investment option?

- Denise

PERSONAL FINANCIAL:

Your investment needs are unique to you, so it is important that your portfolio is suitable for you. Some of the factors to be considered in arriving at that position are your risk tolerance, financial position, time horizon, knowledge of investments, and age.

A low-risk investor is primarily concerned with safety of principal and is attracted to instruments that are characterised by low price volatility. Fixed income securities, money market funds, and money market unit trusts and mutual funds fit well into this category. But they tend to pay for this safety of principal, and in some cases, certainty of income, by paying relatively low returns to varying degrees.

Being low risk should not condemn you or any investor of that inclination to just those instruments, however, for it should be borne in mind that investment is long term and that risk can be effectively managed by diversification which, if done well, does have room for instruments such as ordinary stocks, which tend to be associated with higher risk.

Indeed, some stocks are less risky than others. Such stocks are associated with companies that pay good dividends consistently, have a solid financial position and consistently strong earnings, and hold their price better in a weak market.

As investment is generally long term in nature, an investment programme must also be long term in character, grounded in good long-term instruments such as stocks. Studies have shown that having up to 20 per cent of a portfolio in stocks can boost returns without significantly increasing risk.

 

REDUCED RISK

 

Risk is an integral part of investment. Even instruments that guarantee principal and income do carry risk, purchasing power risk associated with inflation being a primary example. So as effective as diversification is, it does not eliminate risk. It just reduces it.

I like the fact that you have shifted from fixed deposits. They do not really fit comfortably into an investment portfolio. They are more suitable for meeting short-term and programmed commitments. It is interesting that you have rightly adopted a long-term view of investments and have embraced stocks, although I cannot say what was behind that decision.

Although you have changed your stance, you need a portfolio that includes a variety of investment instruments. How much risk you are comfortable with will be reflected in how you allocate your funds among the various types of instruments.

In the long term, ultimately, you need to be able to protect the purchasing power of your money, and that is why equities are important. I am not sure that you are a low-risk investor, but you can determine that by using one of the risk profile questionnaires devised for that purpose. Some investment dealers use some basic ones to help their clients make that determination.

Your risk tolerance is a function of several things such as your investment knowledge and experience, your income and financial resources, past experience with money, your socialisation, and just how you are wired as a human being. You should not be surprised if your risk tolerance changes over time as some of these factors change.

To arrive at a suitable portfolio, you need a qualified adviser to do a proper analysis of your personal and financial situation, your risk profile, goals, needs, and objectives. You should then commit yourself to maintaining your programme unless future programmed analyses show up the need to make changes.

Risk profile questionnaires have their uses but should be used with caution because they are far from being perfect.

As for investing a set sum every month, this is a great idea. It should bring discipline to your investment programme, allow you to secure instruments at various prices, reduce the need to have a fixation on what the markets are doing, and reduce the impulse to exit the markets when they are in decline as will happen from time to time.

Although you will need some help initially, with time, experience, and knowledge, you may be able to make your own analyses and decisions. Aim for that.

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

finviser.jm@gmail.com