Building an investment portfolio

Personal Financial Adviser with Oran Hall

QUESTION: I am a young man who is just starting out in his career. Everyday I grow increasingly worried about the state that this economy is in. An example is the plummeting of our currency. Times like these call for serious planning. I would like to know how I may go about building my investment portfolio, where I can gain the knowledge so I can differentiate between a good and a bad investment. After all my monthly expenses, the maximum amount I can invest is J$20,000. I have no car so that lightens the burden on my pocket but I am thinking of getting one. I anxiously await your response.

-Letts

FINANCIAL ADVISER: You have started off on the right foot; you are saving and have a savings plan. You need savings to invest.

You realise also that investing is a learning experience and it is encouraging that you are making an effort to get an understanding of what to do before venturing into it. You have the right attitude.

To build your investment portfolio, first evaluate your personal and financial circumstances so that you can set your objectives and determine the level of risk you can take.

Important matters to consider are your age, marital status, employment status, how many dependents you have and your health status.

In considering your financial position, you would determine your net worth, that is, your assets less your liabilities, taking note of all you own and is owed to you and all that you owe. Make sure you make a budget to enable you to manage your money well. Note any tax considerations that may apply to you.

Be honest with yourself about how much you know about investments: how the markets operate, the main investment instruments and their basic features as well as the costs of buying and selling them.

Determine if you have the time required to manage your portfolio or if you will need to engage the service of a professional to do so. Make an effort to know even at a basic level how the prices of securities are determined.

Be clear about how much risk you are able to and are willing to tolerate. Remember that investing is not a short-term business so be prepared to see the prices of some securities fluctuate.

You should be able to keep calm when the markets do not seem to be in your favour.

Although it will be necessary to buy and sell from time to time, you should remember that you will incur various expenses when you trade and thus reduce your gains. Calculate your returns net of your expenses.

As much as possible, have a time horizon for your investments; you may want to hold some securities longer than you hold others. If you know your goals, it will make it easier to determine your time horizon.

Avoid greed. It is generally unwise to hold on to an investment to sell at the highest possible price. None of us can accurately predict the highest price to which an investment instrument will rise.

Investment objectives are important. Income, growth, safety, tax minimisation and ease of management are some investment objectives.

There are instruments for each objective. Some instruments can satisfy more than one objective. Interest-bearing securities offer income and safety, stock offers growth, some income in the form of dividends and tax benefits from capital gains.

Unit trusts offer ease of management and tax minimisation in most cases. You should be careful to invest in securities that are marketable to comfort yourself that you will be able to sell when you want to.

If you need to convert your investments to cash easily, that is, you want liquidity, consider unit trusts and mutual funds.

Age is important. Younger investors, though often inexperienced and having less financial resources, have age on their side and thus better able to take risk.

Persons nearer to retirement are better off toning down on risk but it should be recognised that some not-so-young persons have the capacity to take risk because of the level of their financial resources.

ASSET MIX

A very important decision is the asset mix, which refers to the proportion of your funds that are invested in the various types of investment instruments such as stock, unit trusts and bonds.

At the end of the day, that is the most important decision as it determines how well your portfolio performs. Initially, you may need the help of a competent professional to make this decision.

The asset mix you choose will reflect the level of risk you can tolerate and your objectives and it also gives an indication of your time horizon. Do not allow another person's asset mix and investment decisions to affect yours.

Although you may need guidance from a professional, ultimately, you are the decision maker. I wish you well.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial planning.finviser.jm@gmail.com