Lavern Ansine, Contributor
SPIRALLING INFLATION in recent months has had investors scurrying to find ways to earn a positive real return on their savings. To achieve this objective in the last 12 months, investors would have had to earn in excess of 15.90 per cent on their investments. Some investors have opted to increase their real estate holdings. However, many smaller investors find the current real estate prices prohibitive and even very large investors with significant real estate holdings prudently include some financial assets in their investment portfolios.
Therefore, whether you are a small or large investor you will need to determine which combination financial instruments will maximise your returns without taking you outside your risk tolerance parameters.
Assume that an investor has J$500,000 to invest for the next 36 months and that the current inflation trend continues over the stated investment period. Further assume that the investor's objective is to earn a positive real return. An investment in fixed income instruments only, will produce a negative real return as the average rate on these investments is currently below the inflation rate.
STOCKS
Though investors assume a greater level of risk by investing in stocks, such an investment provides him or her with a greater opportunity of beating inflation. Given our investor's risk profile and earning objective, the $500,000 can be evenly apportioned between a fixed income J$ unit trust fund and stocks.
The stock market has been generally sluggish this year. However, this performance is not expected to continue over the next 36 months. Even with the lacklustre performance of the market since the start of the year, the average return of the top five performers in the market is over 30 per cent with the top two performers returning in excess of 48 per cent on average.
The anticipated initial public offerings (IPO) by Supreme Ventures and First Global are expected to energise and create renewed interest in the market. Local investors have traditionally exhibited an insatiable appetite for IPOs. Of course an overall upswing in the stock market will require an improvement in investor confidence.
BUY WISELY
Investors are encouraged to buy stocks of companies that have good management, strong earning potential, diverse revenue streams and a generous dividend policy. Include a few financial stocks in your portfolio as these usually exhibit resilience in a tougher economic climate. Don't spread yourself too thinly. Select a few solid companies and buy into those instead of investing a small amount in numerous companies. Over- diversification can significantly reduce your returns.
The yield on the average J$ fixed income unit trust fund tends to be higher than the returns available in the short-term money market. A well managed fixed income fund will also allow investors to quickly benefit from an interest rate increase. Currently, the average 12-month yield on fixed income unit trust funds offered in Jamaica is approximately 13.50 per cent with some funds yielding above 14 per cent. Continuation of the current economic policies should ward off extreme devaluation of the local currency and prevent erosion of real returns on J$ investments.
Lavern Ansine is an investment advisor at DB&G's Kingston branch. To further discuss investing and the many options we have available, contact her at info@mydbg.com or toll free at 1-888-CALL DBG.
