Q&A with CMMB Securities

Q: I always hear that owning your own home is the way to go. I am single, in my early fifties with no children. I do not own property and live in a rented house. I’m sure I could qualify for a small mortgage, but is there really that much benefit for someone in my situation to become a homeowner?
Asha, Sangre Grande

A: Owning a home is always the best way to go. But it may not be practical to do this at your age. The reason is that the maximum repayment period that you would probably obtain from a financial institution at this stage would be about ten years. Consequently, the monthly installment might be too much for you to pay. However, if you can arrange your finances in such a way that your total debt servicing per month is less than 40 percent of your monthly income, you should be able to handle the mortgage along with other household expenses and still put aside something for your retirement. In this way you would be able to take advantage of the tax deductibility of mortgage payments on your tax return until sixty. Another option you can consider is taking out a joint mortgage with a  younger relative to whom you would eventually leave your house. This would enable you to stretch the mortgage over a longer period and take out some life insurance, which would eventually pay off the mortgage in case of untimely death.

Q:   I know there is always a risk involved when you invest money, but is there a way to make sure that the original sum doesn’t get blown away?
Pamela, Carenage

A: There are two major categories of investment instruments. Firstly there are fixed income instruments like Savings accounts, Certificates of deposits and Money Market Accounts where a built-in feature of the investment is to keep the principal protected. However, this is not to say that your principal is “guaranteed”. Like an insurance policy the risk coverage is dependent on the ability of the insurance company to pay. So even if you prefer fixed income instruments your principal is only as safe as the strength of the institution in which you are placing your funds. As we saw with Finance Houses during the 80s while clients invested in fixed income instruments, which supposed to have kept capital intact, these financial institutions went bankrupt due to imprudent management and people lost a lot.

The other type of investment is referred to as equities. Examples are local and foreign stocks. Embedded in these instruments is what is referred to as downside exposure, where there is a possibility that your principal could be eroded. However, for the higher risk involved the investor is given a much higher return than can be expected on a fixed income instrument. Therefore, if you are not prepared to expose yourself to high-risk, then fixed income instruments is the choice for you. Even if the financial institution offering an equity-based product is strong, one can still lose part of the capital since this is an expressed feature of equity based products. Investigate the features of these instruments or talk to a qualified financial planner to get advice.

Q: Almost every week in your column you tell people to diversify their investments. Why do you stress it so much and why would that reduce any risks? I would have thought that if you spread your money around in too many places it’s like being “jack of all trades and master of none”
Anand, Couva

A: There is an old adage in life “do not put all your eggs in one basket”. It is also relevant to investments and is the essence of diversification. Spreading your investments across a variety of instruments reduces the overall risk of your investment portfolio. A portfolio is the group of investments you are holding. There is no mystery to diversification. For example, if one or more investments is not performing well, then the others may be doing better than expected thus maintaining an overall high composite return on the portfolio. This is diversification in action.

In this way the probability of attaining the expected return on a portfolio is increased when income is coming from a variety of sources rather than from just one or two. You are right in that spreading your investments does tend to require your knowing a little of a lot of different things. However the market has been structured in such a way to prevent one from becoming too much of a “jack of all trades and master of none”. Investment Managers are now being given incentives to become highly specialised in a particular field of finance. For example there may be analysts who know a lot about biotech stocks, but little about banking stocks. The overall manager of a diversified mutual fund would thus have to hire other specialists from different sectors of the market to draw on expertise from a variety of areas. A mutual fund would have many different managers each hired to take care of a particular sector.

Questions can be sent to:
PO BOX 1830, Wrightson Road,
Port-of-Spain. Or Email:
cmmbsecurities@mycmmb.com