WHEN an investment ends, the big question for investors is: “What should I do with my money now?” Sterling Asset Management, known as the bond experts, ensures investors avoid common reinvestment missteps when taking proceeds from a previous asset and reallocating them into a new investment.

“It’s a repositioning of an existing asset into something else that can generate income,” explained Anna Joy Tibby-Bell, assistant vice-president of financial planning, in an interview with the Jamaica Observer.

When a bond or investment reaches maturity it means the predetermined end date has arrived, and the investor receives their original investment back, plus any final interest. This point marks a crossroads as it relates to a critical decision — whether to reinvest those funds to match or surpass previous earnings. But when venturing into the next investment, Tibby-Bell revealed that the team has identified three common mistakes investors make, with the first being a lack of diversification.

Tibby-Bell explained that some investors put all their money into one asset or sector, which increases risk.

“We want to implore that you diversify across asset classes, to better diversify and have more growth and stability in your portfolio,” she said.

Tibby-Bell noted that while having a diversified bond portfolio is beneficial, investors should also consider adding stocks and real estate. The key is to avoid putting too much into one type of asset.

“If something happens in that sector, you could face serious losses,” Tibby-Bell warned. “In the case of a bond default, for example, you might lose part of your principal.”

She pointed out that Jamaica has seen various instances in which investors suffered significant losses, which she described as devastating.

The second mistake she outlined is that investors pursue high returns without recognising the risks involved. While high interest rates can seem appealing, they often come with hidden dangers that may not align with market averages. Tibby-Bell stressed the importance of understanding the credit quality of investments, and being cautious with outlier offers. For instance, if market rates hover between seven and eight per cent, an offer promising 15 per cent should raise questions. Investors are encouraged to dig deeper, remain curious, and consult financial advisors to ensure their investment choices are sound and align with their risk tolerance.

“It’s about understanding the actual history of the company. You know, do they have good creditworthiness? Right, so it’s important to understand that and ask questions — and not just look at an interest rate and just say, ‘Oh, let me get this because it’s giving me X.’ There may be other hidden risks involved that may not be as visible to the investor,” she warned.

Continuing into the third common mistake, Tibby-Bell pointed out that it ties closely with the previous one: Understanding the interest rate environment and recognising when a rate is an outlier. She explained that when market interest rates range between seven and eight per cent, offers of 15 or 20 per cent should be flagged as outliers. This awareness helps investors identify when a rate does not align with the current market conditions. She further explained that bonds are particularly sensitive to interest rates. As interest rates rise, newly issued bonds come with higher rates, making it crucial for investors to avoid being locked into older bonds with lower yields.

Tibby-Bell advised that staying informed about financial news is essential to avoid these pitfalls. Currently, Jamaica is seeing a decline in interest rates, following Bank of Jamaica (BOJ) and the US Federal Reserve which have both lowered rates. According to Tibby-Bell, now is the ideal time for investors to act. She advised that investors should consider locking in bonds at current rates rather than waiting, as future bonds could offer lower returns.

“If you wait a year, new bonds might be issued at six or five per cent, when right now you could secure eight or nine per cent,” she explained to Sunday Finance.

High interest rates are a tool used by central banks to tighten liquidity so as to control inflation. However, with inflation now under control the focus has shifted towards economic expansion, which means central banks are cutting rates. Both Bank of Jamaica (BOJ) and the US Federal Reserve have started to lower their rates, signalling a trend that is likely to continue. With savings account rates and other interest rates expected to fall, investors are flocking to bonds as a more attractive option. Tibby-Bell emphasised that this presents a prime opportunity to invest in bonds.

“You want to lock in higher rates now because, chances are, we won’t see these rates next year or in the years to come,” she explained.

She gave an example, citing that an investor might purchase a bond today at $100 with an eight per cent yield. As rates fall and demand for those higher-yield bonds rises, that same bond could be worth $115 or more within a year or two. This is why the current market climate is seeing an increase in bond prices, driven by investors eager to secure higher returns before they diminish. However, as bond prices increase, the yield, or return on investment, decreases. Tibby-Bell cautioned that waiting too long to invest could lead to lower overall returns, even if the coupon rate remains high. Still, for income-focused investors, bonds remain a viable option since they provide a fixed return. Even if the yield drops, the rate will still offer a predictable income stream.