IN OUR extended version of Invest! More Money turned to another Jamaican powerhouse financial institution - Barita Investments - to speak on how to best use your Christmas bonus/profit share.Roger Grant, planning & development manager at Barita Investments Limited did the honours for us and created portfolios for investors.
He says, "It is customary for many companies in Jamaica to pay an end of year bonus or profit share. If you are lucky enough to receive an annual bonus from your company, should you go on a shopping spree or invest the money towards your future?
Receiving a bonus can be exciting and one can imagine several possible ways to spend it. To add to the temptation, the media is full of enticing advertisements aimed at parting you from your hard earned money. The annual bonus should never be used to buy some unnecessary big-ticket item, instead it is be viewed as an opportunity to get a lump-sum payment that can be invested towards achieving your long-term goals. "
INVESTMENT VEHICLES
Mr. Grant advised, "There are several types of investment vehicles to choose from varying in risk and return.
Stocks:
Historically, stocks have provided a higher than average return, however they are considered to be risky.
Government bonds:
Government bonds on the other hand are considered to be the least risky investment type, but yield a lower return. One should consult a financial advisor for professional advice as to the best way to invest the funds. The advisor may recommend a mix of securities based on your investment objectives."
That said, he noted, "We can demonstrate the benefits of investing your bonus by the following two scenarios:
Scenario 1: A single mother in her 40s with one child with the objective of establishing a college fund and,
Scenario 2: A married couple in their 30s with two children with the objective of establishing a retirement fund.
For simplicity, we will assume the individuals will have an opportunity to invest in a combination of stocks and bonds."
SINGLE MOTHER PORTFOLIO
We can assume that a single mother in her 40s may not be able to afford much risk in her investments, therefore a portfolio of securities that equates to 70 per cent bonds and 30 per cent stocks may be right for her. Using actual average rates of return over the last five years for bonds and stocks as a basis for the calculation (average 90 day repo rate 2000 - 2004 - 16.26 per cent and JSE Index average 2000 - 2004 - 39.76 per cent), we can conservatively project the following return on the portfolio after five years for various amounts invested:
Scenario 1
70% Bonds
30% Stocks
Projected rate for the portfolio 16%
Amount Invested 5 years
$20,000 $42,007
$50,000 $105,017
$100,000 $210,034
MARRIED COUPLE PORTFOLIO
Assuming both persons work, a couple in their 30s may be able to afford more risk in their investments with 70 per cent of their funds in stocks and 30 per cent in bonds. Once again, using a conservative approach to calculate the assumed rate, we can project the following return after five years for various amounts invested:
Scenario 2
30% Bonds
70% Stocks
Projected rate for the portfolio 25%
Amount Invested 5 years
$20,000 $61,035
$50,000 $152,588
$100,000 $305,176
Mr. Grant then says, "The above scenarios are based on investing just one lump sum amount, the results would be significantly higher if your bonus is invested in a similar fashion each year. Putting a bonus to work for you and your future is by far the best gift you can give yourself. By remembering one of the first rules of investing "pay yourself first" and by exercising some financial discipline you will be able to reach your financial goals."
Author's note: Rates quoted above are for illustrative purposes only, actual rates may vary significantly over the projected period.
