Investment alternatives for a student

A question I would like to pose, though, rather than working excessively hard for money, I would like to figure out ways by which I can make my money work for me. I have purchased four stocks since last December: National Commercial Bank, GraceKennedy, Carreras, and Jamaica Money Market Brokers. So far, compared to fixed deposits I held earlier, the returns have been great.

I would like now to take out the money I placed on fixed deposit and put it somewhere more promising, but not to put everything in stocks. Could you tell me a few alternatives I may try?

- Morrison

PFA: Don't be so hard on yourself. At least, you have some knowledge of some of the available investment instruments and have some understanding of how to make your money grow.

You recognise the importance of benchmarking the performance of your portfolio. You also recognise the value of diversifying your portfolio and understand that although it is important to improve your yield, there is a place for caution. There is some evidence also that you do evaluate your portfolio. You will get better with time.

I am not sure what you want to achieve from your portfolio. That is important. It will help you to determine your asset allocation, that is, what portion of your funds to invest in the various types of investment instruments. You should make that decision now; it will have a more significant bearing on the performance of your portfolio than the actual securities that you select.

I cannot promise you that you will find investment vehicles that can give you the yields you have seen on your stock portfolio. Remember that it can, and will, lose value sometimes.

unit trusts

The unit trusts that have growth as their main objective can probably give you comparable returns. They are more diversified than the portfolio you have put together and are also easier to convert to cash, but they invest heavily in stocks themselves. As such, you should be careful of how much you invest in them considering that you already have funds invested directly in stocks if you want to maintain a proper balance in your portfolio.

Is it not interesting that the money market unit trusts have shown relatively good increases in their unit values over the past year, the Jamaica Debt Exchange notwithstanding? The managers of these funds are doing some interesting things to generate these comparatively good returns. You may want to explore that option.

These instruments are quite liquid and give returns that are better than fixed deposits which pay rates ranging from less than 1.0 per cent to about 6.0 per cent depending on the amount and term. The unit values of most funds increased by more than 10 per cent over the past year.

There is no guarantee that these returns will be replicated in the future. Of importance also is that the returns to you are not a function of the size of your investment unlike fixed deposits which pay higher rates on larger amounts.

These unit trusts can qualify as long-term savings accounts (LSAs), which enjoy favourable tax treatment. In this regard, they have an advantage over other LSAs.

Whereas the J$1 million maximum sum allowed for LSAs over a one-year period is determined on a point-to-point basis — April 1, 2011 to March 31, 2012, for example — the J$1 million limit applies to sums invested in a money market unit trust during a calendar year, meaning if you invest J$1 million on July 12, 2011 and a similar amount on May 23, 2012, you get a tax benefit for two years if all conditions are met.

Of course, that sum may be invested in instalments during the course of the year.

Treasury bills, repurchase agreements and longer-term Government of Jamaica instruments give better returns than fixed deposits but the difference narrows as the funds on fixed deposit increase and the term gets longer.

Our financial market is still developing, so the range of instruments is still relatively narrow. If you establish a long-term programme and stick to it, you should be able to achieve your goals. Begin by being clear about what you want to achieve.

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.finviser.jm@gmail.com