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If Wishes Were Horses
Sunday 5, August 2018

If wishes were horses…

YaniqueF_1

Many of us wish we could become millionaires.  Some of us wish this every single day.  How can we take what we have now and turn it into millions? (of US dollars of course). For those of us who may have received a lump sum of money, perhaps in the form of an inheritance, a property which was sold, a payout from an employer, or your pension savings, we are often perplexed by the array of investment options before us.  If you have found yourself in that position, here are a few suggestions for you.

Firstly, do not advertise.   When you come into money, keep it to yourself.   Take some time to set your goals. Are you seeking income or growth? How much income do you need? The rest should be allocated to growth-oriented investments. Keep as little as you need to in cash.  This will also determine the risk profile of your investment portfolio. 

Bonds generate good income and growth

Bonds help you to earn stable and predictable income. A bond portfolio can generate growth if it is actively and effectively managed. However, the bond market is huge, so it is important to get an advisor that can appropriately analyze the risks and returns. Stick to bonds with high liquidity (i.e. they are easy to sell), low credit risk (i.e. the issuer is likely to repay its debts) and low duration (i.e. a maturity or call date in the next 5 to 7 years).  Bonds give you the flexibility to choose your income stream and the timing of it across several months of the year. Over the last 10 years, bonds have done very well as both growth and income investments.   

Equities are vehicles for growth over the long term

With equities come volatility and also the chance to earn high rates of return over the long term. Equities should form a part of every portfolio’s growth allocation.  There are stocks which pay consistent, attractive dividends (measured by the dividend yield) and there are stocks which pay no dividends but you may perceive them as having higher growth potential.  For example, AT&T pays a steady dividend while Amazon pays no dividends.  You can get research on the various Jamaican or U.S. stocks from your advisor.  If you choose to invest in the U.S. stock market, you will find it is far larger, and will take more time to examine the various stocks.  Many advisors suggest Exchange Traded Funds (ETFs) for this purpose.  There are ETF’s that track almost everything in the market. There are ETF’s that track the performance of the S&P 500, the tech sector only, the cannabis sector, the video game sector, the price of oil – almost anything you can think of.  

Keeping Real Estate

Real Estate is an expensive asset and the transaction costs are high.  While some real estate can preserve value, the asset class is highly illiquid. To get into and out of the real estate market can take several months and cost a lot in terms of fees and taxes. In contrast, it takes two days to liquidate a bond or stock investment in the global markets. It is easy to see the price or market value of a stock or bond - there is very little room for disagreement between buyers and sellers. However, buyers and sellers often negotiate extensively to reach an agreed upon price for a piece of real estate.  Local real estate investments must be discounted for inflation and devaluation to get a real return. In other words, your investment return needs to exceed the inflation rate JUST to break even.  However, you may choose to include real estate in your portfolio for either income, in the form of rent, or growth-if you believe the area or property has potential to increase significantly in value.

 Keeping Cash

If you decide to keep a percentage of your portfolio in cash or short-term investments (30 to 90 days), you will need to bear in mind that Jamaican investments are below 2.00% and that is before tax.  Keeping a lot of your funds in short term cash will get you nowhere fast.

Thieves

Don’t forget the thieves of inflation and devaluation on your investment.  Over the last forty years, the Jamaican dollar has devalued an average of 11.60% against the U.S. dollar.  Inflation has also averaged 8.01% over the past 16 years. These thieves can take a lot more than the two-foot variety.  So be careful how you craft your portfolio so that the right allocation is achieved. 

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

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