Oran Hall | Millennial desire: Being financially prepared for anything
Published:Sunday | December 6, 2020 | 12:12 AM
QUESTION: I am 31 years old with a current monthly salary of $600,000 from two sources. My monthly expenses generally do not exceed $150,000. I also believe myself to be moderately knowledgeable on financial management. I already have an emergency fund of $500,000, which I plan to increase to $750,000. I have no loans or financial obligations. I invest in individual stocks, where my strategy is picking stocks with the highest dividend yield, consistent pay-outs and where the companies maintain a good financial position. I also invest in a unit trust capital growth fund as I understand and appreciate the need for diversification. I generally split around $400,000 between the two.
My next plan was to purchase individual bonds as an additional source of fixed income, but most of the bond options I’ve reviewed are out of my reach as they require significant capital. This leads to my question: what do you suggest I do next? I feel that solely investing in stocks is too risky. My financial goal is simply to have tangible returns that can cover most of my monthly expenses as I know that my salary may not remain this high in the long run. Both sources of employment are fixed-term contracts, which leaves me apprehensive and is the reason why I want to invest as much as possible while I can.
– Jay
FINANCIAL ADVISER: It is encouraging to see a young person who has a financial plan and who desires to improve it. I notice, though, that your portfolio is not as diversified as you believe and suggest that there are options to invest in interest-bearing securities if you explore some more.
You are quite conscious of the risks associated with fixed-term contracts although you seem quite confident that you will not likely be out of a job in the short term. Your strategy of building an emergency fund is a good one. I hope it is made up of liquid financial instruments that generate some income, and you are correct in the path you are trying to lay to generate more income and secure some of your principal, which can be achieved by investing in bonds.
Although you are relatively young, you should begin to put in place a retirement fund. If you start early, you can build a solid base for your post-employment years.
You suggest that you are primarily investing for growth through equities by a strategy you have defined well, as well as through capital growth unit trusts. I cannot say if all of the stocks you have bought are Jamaican stocks, but bear in mind that you can invest in stocks in foreign countries if you have the time and resources to do so.
The capital growth unit trusts tend to be heavily invested in ordinary shares, and it is quite possible that your portfolio includes stocks that are included in the investment funds of the unit trusts. In such a case, overall, you could be more heavily invested – directly and indirectly – in some stocks than you realise.
You have indicated that you are not able to source bonds because you do not have the money required to make such investments. Bear in mind that there are unit trusts that focus on money market instruments as well as on bonds. These offer some level of security of principal though not current income as the interest such funds earn is generally reinvested.
With regard to bonds, I am assured that they are available and accessible to investors lacking deep pockets. Much depends on the dealers you have made enquiries of. There are minimum transaction levels set for bonds in the international market and for Government of Jamaica and Bank of Jamaica debt securities, but some dealers do retail them to their clients, in some cases executing contracts for US$1,000 and J$5,000.
But there is a problem with these small transactions: liquidity. Often, it is quite difficult to sell these small amounts of debt securities. And there is another problem: the shortage of local corporate debt securities, so it is true that your options are limited.
You are correct in your desire to diversify your portfolio and particularly to introduce bonds, but your desire to generate income limits your ability to use unit trusts to build that element of your portfolio. I have based my comments on what you have shared but suggest you see a competent investment dealer to give more detailed guidance.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.