IT may seem as if retirement is in the distant future, but it's never too early to start planning to enjoy it as well as how to finance it. The other day I had a client who said "If only I knew then what I know now". I asked, "What would you do differently?" to which he replied, "Start investing earlier". This is a statement I have heard many times over the years. So then, "What is preventing you from starting?"
One of the obstacles is that we think we have a lot of time and put off for tomorrow what we can do today. Inevitably, time catches up on us and before we know it, retirement is on our doorstep. If you are one of those people, then this article is for you. Long-term investments are good for planning for your children's education, buying a home or car, planning that family vacation and, of course, retirement. Here are four tips to help you on your journey.
Save on a regular basis. For adults, salary deduction, which is a disciplined form of saving, is a very good option. If you are already disciplined, then try to put aside 10 per cent each month (this may vary depending on your circumstances). Another idea is to help your children or grandchildren by giving them gift certificates for investment, rather than a toy or a game which they will grow out of. Each time they receive money as a gift, invest it for them. Help your children to participate in savings programmes as these will teach them responsibility and how to use money wisely. If prudently invested, these funds can be a great help when they are ready for university or when they are finished with school.
Invest longterm. These are to be held for many years and are not intended to be disposed of in the near future. The minimum investment period should be three to over 10 years. Stocks or equities (used interchangeably) are a good long- term investment (local or overseas) for your portfolio. Other long-term investments are bonds which are available in Jamaican or other currencies. Bonds are fixed-income instruments which are issued for the purpose of raising capital. There are basically two types of bonds, sovereign (country) or corporate bonds with different risk levels. Most bonds offer semi-annual interest payments. Having more than one bond with different payment periods ensures regular income.
Unit trusts or mutual funds are other long-term investment options that do not require a large sum of money to start off with. Real estate is another popular long-term investment but usually requires more capital to participate. For persons who are self-employed, it is important to invest in an Individual Retirement Account (IRA). For those whose company provides a pension scheme, find out the maximum you can contribute to your scheme on a monthly basis.
Diversify. Having a diversified portfolio ensures that you spread your risk. After all, investments are cyclical. Your portfolio should reflect short, medium and long term instruments. Spread your risk across money market instruments (for example, treasury bills and repos), bonds, equities, unit trusts and mutual funds.
When investing in stocks, consider buying in different sectors such as banking, retail (food and merchandise), manufacturing, health and insurance to name a few. Have a variety of dividend and growth stocks. Also include investments in other currencies as these will hedge against inflation and is another way of diversifying your portfolio. If you own real estate consider rental income as another source of earning income.
Rebalance your portfolio. As your circumstances change, for example, getting married, owing your own home or sending your kids to university, rebalance your portfolio accordingly. One also has to take into consideration what is happening in the local and global economies. Start paying off or significantly reducing your major debts such as car loans, mortgage and other cash flow drains as quickly as you can. Adjust your asset allocation based on your spending patterns. If you are spending more than your assets are earning you may have to lower your spending and take some more risks in the hope of increasing your returns. However, the closer you are to retirement, the less risk you may want to take on, versus when you started.
In closing, it would be wise to reinvest the money earned from your bonds and other investments to capitalise portfolio growth. Compounding your returns can amplify inflows from investments thus creating more passive income. When in doubt, get independent and objective advice from your wealth advisor.
Deborah Vieira is a Wealth Advisor at Stocks & Securities Limited and can be contacted via firstname.lastname@example.org