What is the best investment for me?

QUESTION: I just read your advice to someone wanting to purchase a house in a year's time and I thought you could advise me of the best investment for some money I have saved.

- Marion

PFA: There is no single "best investment" that is suitable for everybody, and giving advice is extremely challenging when, as in cases like yours, far too little information is provided.

Good, effective investment advisers take time to get very important personal and financial information from their clients, and seek to know their goals, constraints, and risk tolerance before making investment recommendations for a reason: they want to make suitable recommendations.

Although you have not stated your age, how much money you have to invest, for how long, and how you see your own attitude to risk, I am encouraged by the fact that you recognise that it is important to save to be able to invest.

I will make some general comments before identifying investment vehicles that match certain investment objectives. Markets are rarely predictable, so investments will go wrong. Investing is long term in nature and is risky, so it is not about making money immediately. The best investment is not necessarily the one that gives the highest returns; it is the one that gives the best returns at your level of risk and is most suitable to your needs.

factors to consider

What are the factors that must be considered to determine the best investment in particular situations? Let us begin with risk. Risk can be defined as the extent to which the possible realised returns of an investment vary from the expected returns.

The more the short-term returns vary, positively and negatively, the more risky the instrument is, and the better the prospects for high long-term returns. High-risk instruments may give very high or very low returns.

The investor who has the capacity and willingness to tolerate these wide variations in investment returns is considered to have a high risk tolerance. If this profile fits you, then ordinary stock (equities) and unit trusts that invest in them are good for you.

But if you have a more risk, averse, conservative profile, you would best stay away from such investment instruments and opt for bonds, which are safer, but which may still lose value when interest rates increase if they are fixed-rate. This need not be a concern if you plan to hold them to maturity.

If you intend to hold your investment for the long term, equities, bonds, and units trusts are also suitable. Real estate is also a long-term option. Of the above, unit trusts may be suitable for the short term, but ideally, these should be held for the long term.

suitable investments

If you want capital appreciation, suitable investments would be equities, real estate, unit trusts that invest in these instruments, and preference shares. Bonds also have scope to appreciate in value if they are bought at a discount, or if interest rates decline after they have been purchased.

For income, dividends may be derived from ordinary stock. Dividend yields may not be attractive, though, and dividends are rarely paid more than twice a year, most times only once, and sometimes, not at all. Rent can be earned from real estate and interest income from bonds and preference shares. These are in limited supply in our market.

If your investment knowledge is limited, if you have little time to manage your investments, if your investment funds are limited, if you want to have access to several types of investment instruments in one investment vehicle, the unit trust should be your instrument of choice.

You may opt for unit trusts that are growth oriented, or unit trusts that earn income primarily because they generally do not distribute income but reinvest it. Unit values of the latter type appreciate with more certainty, but with lower yields over the long term.

To minimise taxes on your investments, choose listed equities, which do not attract tax on capital gains or dividends, or choose unit trusts. Real estate does not attract capital gains tax, but attracts transfer tax and other charges.

To hedge against devaluation of the local currency and add to the diversity of your portfolio, you may opt for stocks, mutual funds, and bonds from markets abroad.

Several local investment houses market these locally. Investing in local companies that generate good foreign exchange earnings is another means of getting some exchange-rate protection.

Focus on the most suitable portfolio, not the best instrument. It will give you more certain returns and expose you to less risk.

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