IF you are in your 20's and you can afford it, now is an excellent time to start building your portfolio for investing. One of the reasons for this is that you can take more risk than say someone in their forties or older. Another thing to consider is that you have time to recover if you suffer a loss in the market. Keep in mind that you will not always make money on every stock but overall, investing in equities/stocks for the medium to long term outstrips many other investment types.
On the other hand, investors in their 40s to 60s cannot afford to take as many risks. Investors in this age group are mostly conservative to moderate. Some of their portfolio (40 - 50 per cent) should be in equities (dividend paying stocks for income) and fixed income. Some examples of fixed income investments are certificates of deposit, treasury bills and bonds (J$ or US$). Fixed-income investments are usually subject to Withholding Tax of 25 per cent. In our low interest rate environment (approximately six per cent per annum), your returns are being eaten away by inflation (approximately six per cent to seven per cent) and therefore you would experience a negative return. Investors need to be aware of risks, inflation, taxes and returns to properly calculate income from investments.
Another point to consider is currency devaluation. The Jamaican dollar from January 2012 to present, has hit a two- year high versus the US dollar with the average selling rate passing the $88 mark. Your spending power is being eroded as we are set to experience a sleuth of price increases. The exchange rate influences production cost which affects everything from our utility bills to the price of fuel to name a few. Other currencies that our dollar has depreciated against since the beginning of the year are the Euro (approximately 10 per cent), the British pound sterling (which has ranged from $132 to $142) and the Canadian dollar (from $84 to $89). Consider moving some of your funds into another currency to hedge against inflation and currency devaluation.
This brings me to another important issue. Some people think that what happens in the rest of the world may not influence events in Jamaica. This is definitely not the case. Hence, it is important to keep a track of current events both locally and internationally. Let's face it, everything is linked in this global economy. For example, the US is experiencing its worst drought in over 50 years and it is one of the world's largest supplies of corn, wheat and soy. Meanwhile, other parts of the world are suffering from floods. What does this mean? Scarcity of goods which leads to higher prices in baked products, feed for animals and cereals; just to name a few.
The situation in Europe is another example. With the reduced spending power, high unemployment and higher taxes affecting consumers in Portugal, Italy, Greece, and Spain (PIGS), these countries have had to cut back on things from luxury goods to eating less at fast food restaurants. In Jamaica, we are experiencing a similar situation to those in Europe with increased taxes and reduced spending power.
One of the silver linings caused by the ongoing economic crisis is the overall reduction in interest rates. This affords investors the opportunity to consolidate loans and take advantage of lower mortgage rates. Consider speaking with your banker about lessening your debt load. Just as important, keep your credit card bills under control by paying off the full amount to reduce extra charges on your monthly statement.
For those retiring soon you may need to review your existing investments to accommodate your change in income and lifestyle. Speak with your wealth advisor as he or she will review your budget and portfolio with a view to preserving capital, reducing debt and taxes and maximising returns.
In essence, what am I saying is that your investments should not be fixed in stone but should monitored constantly to take advantage of the changing economic times and as your needs evolve. Keep yourself informed of events and trends locally and internationally and if in doubt contact your wealth advisor if you need any clarification. I would like to end this article with a quote from Christian Siriano, a fashion designer who won project runway's fourth season, which typifies the current financial times: "A bad investment is going for quantity over quality. If you're trying to be careful with your wallet, especially with the economy right now, you have to choose staple pieces."
Deborah Vieira is a Wealth Advisor at Stocks and Securities Limited and can be contacted via firstname.lastname@example.org