Long-term investment options

Oran A. Hall, Contributor

Question: I have been saving and have $1 million that I can now use for long-term investing. I already own a home and car. What would you recommend? I don't have any immediate plans offhand. Maybe I could use the returns from this to buy an investment-income property.

- Claudine

PFA: Congratulations. How good it is that you have developed the saving habit. It is natural that having acquired two major personal assets, you now want to build an investment programme.

I am not in a position to give you the specific advice you may be looking for because you have not given me much to work with. It is absolutely important that decisions are made against the background of a clearly defined plan.

In your particular case, it is important to know if you have other investments, the overall size and make-up of that portfolio, the primary goal that your plan is supporting, the time frame with which you are working, what level of risk you are able and willing to take, the provision you have made for short-term and unexpected cash needs, and your knowledge of the various investment instruments.

Having said that, I suggest you make a plan immediately. Estimate how much it will cost you to realise the goals you set and in what time frame. Determine how you will measure the progress you are making. Be realistic and specific.

What are the options? Although you have not made up your mind, you seem to be toying with the idea of investing in an income-generating property. By when would you want to make that investment? Are you sure you would want to make such an investment in the long term? What do you mean by long-term anyway?

Long-term option

If purchasing such a property is so far down the road that you would have to make long-term investments to enable you to do so, what kind of returns would you need to make that goal a reality considering the extent to which the price of property is increasing and the cost of purchasing property? All things considered, a long delay in doing so may not be to your benefit.

A low risk, but relatively low-yielding option is long-term bonds, government or corporate. But bonds are not as safe as they may seem and you may not like their yields.

Bond prices tend to fluctuate with changes in the rate of interest, but in the opposite direction; they increase if the level of interest rates decline, for example.

Considering the high level of inflation to which we have become accustomed, even if bond prices remain stable, there is a great likelihood that your investment would realise a loss of value in real terms even if there is no loss in money terms.

I believe you want your capital to appreciate.

Would you want to consider ordinary stock? If you can handle the ups and downs of the stock market and all the attendant risks, here is one investment vehicle that can prove very profitable in the long run. But investing in the stock market requires time — time to do research and time to analyse how your investments are faring.

Collective investment schemes such as unit trusts and mutual funds present another option. Although there are no Jamaican mutual funds, several investment houses offer a pretty wide range of US and Canadian funds, which offer exchange-rate protection and widen the scope of diversification in that they comprise securities from other countries. Even local funds give the diversification advantage thereby reducing risk.

Such investments are easily converted to cash, are managed by professional managers, and may be purchased in small amounts over an extended period.

Have you given consideration to business as a form of investment? Do you believe you have what it takes to grow your wealth over the long term by this means?

What is your ultimate long-term goal - to retire with sufficient resources to allow you to live the way you have been accustomed to live? If that is the case, then the investment portfolio you want to put in place would be in furtherance of that long-term goal. If you want to get more out of your portfolio, invest in instruments that allow you tax-free income and gains such as is available from equities and unit trusts.

You really need to see a competent financial/investment adviser to help you craft a plan for the future. I have just sought to guide you in what to look for. All the best.

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.Email: finviser.jm@gmail.com