Investment blueprint essential for savers
A popular way to build a portfolio is to determine what asset classes to invest in and how much to invest in each class, meaning, how much to invest in stocks, bonds and so on.
QUESTION: I would like to know more about the investment plan, for example, the step-bystep process of how it works, the specific longterm benefits, and what can be accomplished by means of this investment plan. FINANCIAL ADVISER: I am not sure that I know what you want me to address so I hope that my response will address, the particular issues that you have in mind.
Generally, investing requires that you have a plan. The first step is saving. Savings refer to the portion of your income that you do not spend. Savings provide the financial resources that are needed to make investments. Investors can participate in the money market and in the capital market. The money market is where short-term, low-risk, highly marketable debt securities trade. Examples of money market instruments are repurchase agreements (repos), treasury bills, and Bank of Jamaica certificates of deposits. The money market is a subset of the fixed-income market. The capital market facilitates trading in longterm, higher-yielding but more risky financial instruments such as stocks, preference shares, and bonds, which are generally fixed-income securities. Stocks represent ownership in corporations and preference shares are instruments that have
some features common to ordinary stock and others that are typical of bonds.
Unit trusts and mutual funds are pooled investment funds that can be converted easily to cash. Some are made up mainly of money market instruments and others of longterm instruments. Money market unit trusts and mutual funds are less risky than other types. Although all types are quite liquid, it is advisable to treat them as long-term investments.
Other vehicles used for investment include derivatives, personal-use items such as art of high quality, commodities, and real estate.
BUILDING A PORTFOLIO
The collective name for the investments that a person or entity owns is a portfolio. A popular way to build a portfolio is to determine what asset classes to invest in and how much to invest in each class, meaning how much to invest in stocks, bonds, and so on. This is the asset allocation aspect of the portfolio-building process.
The next step is to determine which instruments in each asset class to invest in and how much. This is the security, selection aspect of the process.
How you invest is a function of, among other things, when you will need the proceeds, the form of income you want, and how much risk you are able and willing to take.
If income is your main objective, your preferred instruments would be money market instruments and bonds. Although stocks do generate income in the form of dividends, they are primarily for capital appreciation, which is derived from the increase in their market price. Preference shares also generate income from dividends. Real estate also yields capital appreciation and income from rent.
Unit trusts and mutual funds do not generally yield income, but their attractiveness is derived from the appreciation in their value, which makes it possible for the investor to realise a return on investment. The level of price appreciation is largely a function of the type of unit trust or mutual fund. Those that invest in the money market or bonds tend to yield less than those that invest in assets that appreciate in value, that is, assets such as real estate and ordinary stock.
On the other hand, instruments that are primarily for capital growth tend to be more risky. They may experience short-term price declines and increases. These fluctuations, notwithstanding, such investments tend to yield good returns in the long term.
Investing successfully is a means of creating and growing wealth, thereby providing the resources to acquire other assets such as a home, funding education, providing for retirement, and generally creating the base for financial security and independence.
PROFESSIONAL ADVICE
It takes time to develop the skills to invest successfully, but professional investment advisers employed by licensed securities dealers are available to give guidance and advice to persons interested in investing.
It is important to get an understanding of what investments is about and then to consult one more investment dealer. Stockbroking companies and wealth-management companies are good places at which to start.
In summary, save, learn about investments, determine what you want to achieve from investing, determine the risks you can take, determine how you will distribute your money among the various types of investment instruments and then among the various investment instruments, and open an account with a licensed securities dealer.
It is likely that you may need to consult an investment professional to guide you through the various stages.