Hopeton Morrison, Contributor
JAMAICANS OFTEN complain that in spite of how hard they work here at home, they just never seem to be able to accumulate as many investment assets as their friends and relatives in North America and elsewhere in the first world.
Persons of fairly limited educational status leave here and purchase a home in America or Canada sometimes within a year of taking up residence there while many work all their lives here on the rock and can barely afford a small two or three-bedroom "starter" house somewhere in St. Catherine.
There is no one reason for this dilemma. In the first place, up until fairly recently we were never able to access the type of sophisticated financial advice that our overseas 'family' did. That has changed in more ways than one these days.
INVESTMENT PRODUCTS AND SERVICES
Our local financial sector now boasts investment products and services that are comparable to those anywhere in the financial capitals of the world. At the same time, the advent of cable and the Internet has created opportunities for everyone, from the expert to the novice to acquire many of the competencies of the most expert investment analysts and financial planners anywhere.
Not surprisingly therefore, local investors have had to counter a combination of poor investment choices (many Jamaicans remain anchored to safety considerations over more risk oriented, higher yielding investment decisions), and the high inflation levels that have dogged us as a country up until 1997.
That year marked the start of six straight years of single digit inflation broken last year when inflation climbed to 16.8 per cent. Things seemed to be heading back on track with calendar inflation of 3.8 per cent at June this year but Hurricane Ivan will have the last word as soon as we assess the full economic fallout of this natural disaster.
This week we offer some advice on countering both obstacles. Firstly, we focus on setting personal investment goals. There are several variables that influence investment decisions and today we look at three important strategies in the investment decision: growth, income and preservation.
INVESTMENT INSTRUMENTS
Although these three do not assume any particular order it is fair to say that the first stage is growth. Investments grow in several ways. In the first place one should seek to put a lump sum or some percentage out of an income stream into an investment fund on a regular basis. You generate growth in your investments by making the simple decision to reinvest rather than consume.
With the sophistication in investment instruments now available locally, you can go for a mutual fund or unit trust fund on the one hand, or just simply arrange with your brokers to reinvest all interest payments from a bond or dividends from equities into a special reinvestment account if your returns are large enough to warrant this. You would know that equity products including stocks and stock mutual funds or equity balanced unit trusts offer the best opportunity for growth in the value of your investments especially now that the Bank of Jamaica continues to drop rates on its benchmark instruments with a further cut last week.
Which is not to say that diversifying your investments is not recommended as a viable growth strategy. We have seen how much the stock market has been fluctuating since the start of the year with the main JSE index breaking the 100,000 point barrier on April 1 and closing on Tuesday of last week at 97,188 points. So mixing some of your investments in bonds and other forms of investment instruments is another way of assuring growth.
The second strategy is to build an income stream from your investments. This particular stage is even more critical for you if you have retired or are close to retirement. A properly executed investment strategy will provide the income you need to live in retirement or to maintain ageing family members, for example. In the same way that bond interest or stock dividends may be used to grow a portfolio over time, these returns can also provide a steady income source. Interest and dividends are usually paid quarterly, semi-annually or annually. Therefore, you are in a position to plan for it on a regular scheduled basis.
This degree of timing is essential especially where this source is the main source of income.
PRESERVATION OF INCOME
The third strategy is preservation of income. And the best strategy to preserve your investments is more growth. Growth here, however, must be managed differently from that above in that it is often a little slower and less risky than that encouraged at stage one above. When going for preservation the key is to keep your focus on inflation. We tracked our annual inflation figures for the period January 1, 1975 to June 2004.
The total inflation for this period of 29 years was 578.10 per cent. Even more crucial average annual inflation was 19.27 per cent. This rather worrying statistic suggests that any funds you had invested or saved that was denominated in Jamaican dollars would have lost an average of nearly 20 per cent of its value per year over the 30-year period.
This perhaps more than any other variable explains the difference in wealth creation here in Jamaica when compared with many other places. It is the inflation dragon that reduces our investments so dramatically here when compared with that of our relatives and friends in the U.S., England, and Canada. There is, of course, the credible argument that we have also benefited at the other end. For example we experienced record high inflation in the years 1978 (49.4 per cent), 1991 (80.2 per cent), and 1992 (40.2 per cent).
But for the seven and half-year period between 1997 and 2004 total inflation was approximately 67 per cent, resulting in average annual inflation of approximately 8.33 per cent, although this figure would have been thrown out somewhat by the double inflation effects of last year.
In this business, then, of preserving your funds, you should seek to ensure that at all times your funds are delivering better than inflation hence the push for growth. Over the 29-year period mentioned above, some persons have gone the route of investing in fixed income securities alone as their returns for most of this period have generally been better than the inflation rate.
TOTAL INFLATION
But we also tracked the returns of those who invested in the stock market during that period and what do you know? The total percentage change in the main JSE index for the period 1975 to July 22, 2004 was 1132 per cent. This against total inflation for the same period of 578.10 per cent reflects a premium return over inflation for the period of 554 per cent. Of even more significance, this works out at average annual return after inflation of 19 per cent. In our local investment environment there is an even more crucial variable. Over the last few years the Government has removed taxes on capital appreciation of stocks (that is, where the amount that you can sell a stock for has grown above that for which you bought it), and also on dividends on these stocks. That means that whatever your net return after inflation you simply factor in a further 25 per cent to get your "real return on investment".
In other words, if you have been averaging returns of 19 per cent figure above inflation for the past three or four years for example, a factor of 25 per cent added to this works out to be 23.47 per cent. That to our mind is a quite effective way of matching the asset accumulation abilities of our friends and relatives in North America and England. Engage a shrewd mix of investments sensibly diversified with a quite liberal leaning toward equities.
Hopeton Morrison is general manager of St. Thomas Co-operative Credit Union Ltd. and lecturer in the School of Business Administration at the University of Technology. Please send comments and questions to: hmorrison@stccu.com
