Little merit in savings accounts

QUESTION: I have J$1 million in my savings account and would love some advice on the best way to invest, maybe towards a home. I also have J$400,000 in a fixed deposit account.

- Anthony

PFA: So you want to move from a savings mode to an investment mode, but it seems you are not clear why.

Savings bring safe, predictable returns; investment generally yields better returns but with more risk. But you can get better returns than what you are accepting on your savings and fixed-deposit accounts without exposing yourself to greater risk.

It is important that you have a good reason for making your decisions; you must have a goal. You have mentioned purchasing a home, but not in a way to suggest that you are certain that that is what you really want to do.

You see, when you set a goal, you fix in your mind several things: the cost, time line, required rate of return, the required outlay per period, for example. In turn, this helps you to set your priorities and manage your affairs better.

Savings accounts have their place. They are convenient: you deposit and withdraw when you want to, though nowadays it may cost you. But what do you get in return? Low rates.

With J$1 million in a savings account, you are cheating yourself. Your friendly banker is very pleased with you, but it is about time that you become pleased with you.

You may be thinking that savings accounts are safe because of the coverage you get from deposit insurance which covers you for J$600,000 for each category of insured account in each financial institution regulated and supervised by the Bank of Jamaica, which means fixed deposits are also covered.

Fixed deposits give your better returns as you would have noticed, but they are still not the best. Repurchase agreements and money market accounts give better returns, but they are not covered by deposit insurance. Nonetheless, to the extent that they are backed by or are invested in government instruments, you are safe.

The instruments listed above are at the lower end of the risk spectrum but they are not risk-free. The truth is, even if you are fully guaranteed the return of all of your principal, you will be faced with purchasing-power risk due to the high, though falling, levels of inflation in our economy.

understand yourself

Investment vehicles such as ordinary stock which have very good potential for real returns, returns that are higher than the rate of inflation, are more risky. Further, it is important that you understand them and the markets in which they trade to make sense of managing a portfolio that includes them.

I repeat my old refrain: Understand yourself before making any investment decision. Do not make your decision on the basis of what others are doing.

Although you should pay your taxes, it is important that you do all you can to maximise your returns. The Government agrees that you should do that too, hence the various provisions for earning tax-free and tax-deferred income. Interest earned on long-term savings accounts, dividends on listed stock, and gains on unit trusts are some means of earning tax-free returns.

As one with little experience in investment matters, it is important that you get proper guidance from those to whom you entrust your funds.

Sadly, the financial community has a long way to go in offering advice to the public, though it is clear that it has been improving.

One challenge that you will face is financial houses offering you their own products as the solution to your needs even if they are not the most suitable.

This is why you should not become wedded to any institution and why you should check around before you make a decision. Perish the thought of not having the time. You owe it to yourself to do your homework.

The key to making good decisions is education. Read financial material, listen to financial programmes, and attend seminars if you can. Set clear goals, be patient, and remember that you do not have to imprison your money in a savings account.

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