LIVING in a dynamic investment climate can be a good thing or a bad thing. It makes the investment decision making process a little more arduous and forces persons to maintain a more watchful eye on their investments. There are still some persons who are not as keen on following up on their investments and maintain the status quo, ignoring changes that have taken place in the economy that may help to reduce the overall return on their investment.
The classic example of this is ignoring the impact of inflation on your investment holdings. The six-month weighted average Treasury Bill yield for the last ten years reveals that after withholding tax and inflation, portfolios overweighted in Jamaican Dollar fixed income assets have not adequately kept pace with inflation, and in fact, have lost value over the last ten years.
The loss would be compounded greater if persons held most of their wealth in savings accounts or under a mattress somewhere. The irony of this is that persons who maintain their investment holdings in low-interest accounts argue the point of safety as the reason for maintaining a more conservative stance on their strategy; however, given the impact of inflation they are literally "giving away" money over the medium to long term. The consequence of such a strategy is that persons ultimately give up purchasing power over time as the value gets eroded by the impact of inflation, as the cost of goods and services in the economy invariably increases. It therefore means that more and more funds would be required to purchase the same amount of goods and services over time.
Let's put that in the context of investment portfolios. If you had invested $100,000 in a GOJ Treasury Bill ten years ago and re-invested the principal and interest on maturity up to the end of 2012, that sum would have grown to $190,786.18. That represents a 90.8 per cent improvement on the initial sum invested while inflation over that period was 193.9 per cent. This was largely due to the fact that net real interest rates have been negative for seven of the last ten years as shown in the diagram above.
No doubt the impact of inflation in investments is of deep concern to fund managers everywhere and is an important driver of investment decisions for long-term fund managers. Local interest rates have seen a rise post-NDX, perhaps driven by the negative real return on these fixed income assets and demand and supply dynamics. Fixed income holders now demand a return on investment to compensate for higher rates of inflation in recent times and are aggressively seeking a hedge against those risks.
Put in another context, persons saving for retirement have to ensure that they pay special attention to inflation, as the value of a dollar today will certainly depreciate in twenty, thirty or forty years from now. Given that inflation has averaged 11 per cent per annum for the last ten years, it would stand to good reason that investors would seek out investment options that will yield above that return on an after-tax basis if they plan to maintain the same lifestyle in retirement as they did in their working years.
What are the options? There is reasonable merit in adopting a more diversified investment strategy as a means to match or counter the effect of inflation on your holdings. Equity investments have proven to provide fairly good returns over the long term; however, the last ten years has had mixed fortunes for local equities, despite the fact that several companies have performed exceptionally well over that period. Investing in an actively managed equity or bond fund could provide investors with the required rate of return to beat inflation and secure their retirement. However, nothing beats having a conversation with your investment advisor to explore options to generate returns that hedge against inflation.
Kevin Richards is Vice President, Sales and Marketing at Sterling Asset Management Ltd. Sterling is a licensed securities dealer and provides investment management and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: firstname.lastname@example.org or visit our website at www.sterling.com.jm