Savvy in the Short Term

Every investor's journey is different. Occasionally an investor may receive a financial windfall, be it an investment maturity, proceeds from a tender or sale of property or an unexpected inheritance. When an investor receives a lump sum, they may wonder, “What should I do next?” Before taking any action, they should consider how these funds factor into their long-term financial plans, the timeline in which they may need these new funds and their current risk tolerance.

When an investor is unsure of what to do with their funds it is important to remember that money loses value over time because of inflation. A short-term investment can provide interest, liquidity and lessen the risk associated with having the funds sitting as “cash” in a bank account, until a long-term decision is made.

There are a variety of short-term instruments an investor can use to maximize their earnings while formalizing how to what to do with their windfall. A licensed financial advisor is best to consult when making this decision. Additionally, the security of your funds is of utmost importance, as it is not wise in this age of cybercrime to leave large sums in a bank account since deposit insurance coverage only protects depositors from loss up to a specified limit. In Jamaica that limit is J$1.2 million. Additionally try not to have large sums associated with a debit/pos card as it makes those funds more susceptible to being accessed by criminals.

When deciding on your short-term strategy a few key questions to ask your advisor include the interest rate applicable, the flexibility of tenors and the associated fees with the suggested instruments. Another important factor to consider is if there are any penalties or restrictions associated with encashing funds or liquidating before maturity. You will want flexibility to move if you find the appropriate opportunity for your funds prior to maturity.

When investing for the short term you may consider any of the following instruments as suitable additions to your portfolio instead of leaving funds idle in a savings account.

1. Certificate of deposits (CDs) - For Jamaican dollars you may purchase BOJ CD’s through a primary broker or your bank’s wealth division. CD’s tenors will vary but generally the longer you are locked in- the higher your return. These will provide a fixed interest rate until you require your funds.
2. Treasury bills (T Bills) - You may purchase local T Bills or US T Bills to maximize your interest until you are ready to switch to a longer-term option. US treasury bills are considered some of the lowest risk instruments for your funds. The tradeoff for this safety is that yields are lower on these instruments.
3. Repurchase Agreement (Repo) - When investing in a repo you can earn more than a traditional savings account. Tenors on repos generally range from 30, 60, 180 and 365 days.

Short term instruments are great vehicles to maximize return until you make a more long-term decision. It is important to preserve your principal while earning interest. Your financial health is important so never have funds sitting idly. Speak to a licensed financial advisor on how to maximize your returns and how best to place funds for the short term to help achieve your long-term financial goals.

Christine Rankine is the Manager -Personal Financial Planning 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.