Do I lose my money?

Oran Hall, Contributor

I started reading your articles a bit late and I would like to invest my money in certain unit trusts or other investment entities. I think I know a little but would like to know more on the topic of investments and if it is necessary to have a financial adviser. I also would like to know if when the money is invested and the rates fall, if I lose my money and have to invest again or what exactly happens in these times of falling rates.

- Reader

It is useful to have an investment adviser to guide you, particularly if you lack experience or the time to do serious research. There are many different types of investment instruments and it is hardly likely that your entire investment will be completely wiped out in adverse market conditions.

A good adviser should have a good understanding of market trends and of the quality of the various investment instruments. Of great importance is the fact that an investment adviser should be able to assess your situation and your needs and make recommendations suitable to your particular situation. That does not mean though that your role should be passive. At the end of the day, you are ultimately responsible for your personal affairs so you should equip yourself to respond responsibly to any recommendations made to you.

To speak of rates rising and falling suggests investing in just interest-bearing instruments; there are instruments such as ordinary stock for which the values fluctuate but we would not say their rates rise or fall. Let us look at several scenarios to see what happens when interest rates change or the price of investment instruments change.

We will first look at interest-bearing securities. When you invest in short-term securities such as repurchase agreements or treasury bills, for example, interest rate changes will not affect your investment for the term of the investment. The rate of return is guaranteed for the full term of the investment. When these instruments mature, however, if you choose to re-invest your funds, the rate of return will reflect the rates at the time of the new investment.

The situation is quite similar if you invest in longer term instruments such as bonds and debentures. Interest rate changes will not affect the interest you receive as they are guaranteed for the life of the instrument in the case of fixed rate instruments. The rate of return will change, though, if it is a variable rate instrument.

Rates fluctuate

Although interest rate changes will cause the prices of such instruments to fluctuate, that should not affect your investment if you hold it to maturity as the full principal will be returned to you then. Should you choose to redeem your investment before maturity, you could make a capital gain or a capital loss due to changes in the price of the instrument occasioned by changes in the general level of interest rates.

Investing in bonds and debentures could cause you to lose a portion of or all of your investment if the issuer experiences financial difficulty and is not able to honour its commitment to repay the principal at maturity.

If you invest in ordinary stock, you should expect prices to fluctuate with market conditions and should bear in mind that the performance of the company and how the market expects it to perform will bear heavily on its price movements. So you can make a profit or a loss on such investments. You could also lose the funds you invest if the company performs very poorly and goes out of business.

The price of units in a unit trust also fluctuates due to changes in the prices of the instruments in which it invests. The good thing about unit trusts is that they invest in several securities and several types of securities. Even a total collapse in the price of a particular security or type of security will not cause a total wipe-out of your investment. It will likely cause the value of your investment to fall but it will not cause you to lose your entire investment.

There are times when falling interest rates can work to your advantage. When they do, bond prices generally increase, thus presenting an opportunity to sell at a profit if the need to do so arises. Lower interest rates may also cause stock prices to increase if investors shift their demand to stock and away from bonds due to the reduced yields on interest-bearing securities.

Before taking any investment decision, be very clear about what you want to achieve and within what time frame. Continue your efforts to understand the investment process.

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