Financial Adviser | Investment options for recent university graduate

Q: I am a recent graduate of the University of the West Indies, Mona. I was probing the internet to discover suitable investment options, and I stumbled upon a Gleaner article in which you gave investment advice to a university graduate. I, too, am seeking advice on suitable investment options in Jamaica.

Chantal

A: By asking for investment options, it seems that you are asking for financial instruments that are available to investors. May I suggest that you take an important step before focusing on securities selection? I am talking about deciding on asset allocation, or creating an asset mix.

An asset mix is the breakdown of a portfolio by asset type stocks, long-term fixed-income securities, money market securities, real estate, for example. It states what portion or percentage of the portfolio is invested in each asset class.

The asset mix plays a greater role in the performance of a portfolio than the securities that make it up. It is long-term in nature and takes into consideration such factors as the investor's risk profile, goals, and objectives.

The fact that two persons are university graduates does not mean that their asset mix will be the same, and, even if they are, the securities in the portfolio may differ significantly. You seem to realise this. If you did not, I doubt you would have asked for advice. Investment advice has to be specific to the individuals seeking it.

Although you could feel confident enough to create your own asset mix with some understanding of the various types of securities and what you want to achieve, it is advisable to get professional help. The asset mix will help you to keep a long-term focus on your investments so that you will be less inclined to respond to every development in the market.

There will be times when the asset mix will get out of line, particularly when the price of some assets such as stocks rises or falls dramatically. You may choose to do a rebalancing of the portfolio to restore it to the desired mix if certain conditions that you set beforehand are met.

INVESTMENT INSTRUMENTS

Establishing an asset mix does not mean that it would not be necessary to sell some instruments; the poor performance of a security could provide a valid reason to jettison a security, for example.

It could take some time to realise your desired asset mix. If your resources are limited, you could focus on one or two types of security initially, and then carefully invest in others as you go along. If your financial base is stronger, you could invest at the outset in a way that achieves your desired asset mix.

What you want to achieve will determine the weighting of the portfolio. If you are interested in capital growth primarily, stock and real estate-related investments would have a higher weight in the portfolio, that is, a higher percentage of your funds would be invested in those investment media. Interest-bearing securities would have a higher weight if your primary concern is income or the preservation of principal.

What are the available investment instruments? Ordinary stock is a very good option for capital appreciation and, therefore, a hedge against inflation. Notice how well the stock market is doing now. But note that it did not always do as it is now doing. Patience is the name of the game.

Stocks make it possible to invest in many sectors of the economy, and it also allows investors to participate in the ownership of assets that would normally be beyond them given their own limited resources. Note, for example, that investors can invest in real estate by buying ordinary shares of the real estate investment trust listed on the Jamaica Stock Exchange.

If we choose to bypass the more sophisticated securities that are being introduced to the market, I could mention the securities that I mention regularly in this column: Bank of Jamaica treasury bills and certificates of deposit as sources of income and capital preservation, a wide variety of unit trusts to satisfy various investment objectives, US and Canadian mutual funds marketed by local investment dealers and bonds and preferences shares which are less visible in the investment market.

I suggest you focus on an asset mix that can take you from where you are to where you want to be, and then select suitable instruments under each asset class. And make sure you have a diversified portfolio.

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