Q&A with CMMB Securities

Q: I’m in my late sixties and rely on the financial package I got when I retired for my income. Is it too late for me to get involved in investing? I would really like my money to be growing a bit, so that I don’t outlive it.
 
Pearl, Siparia

A: It is never too late to get involved in investing. The key is to identify your particular investment needs and objectives. Since you have retired and are not drawing a salary, security of income would be most important to you. By extension, your risk tolerance would be low, since you would want to protect the principal you received at retirement. In such circumstances, you may not want to invest too much of your funds into the stock market as there may be a degree of short-term volatility which can erode the value of the funds invested.

Therefore the amount invested in the stock market should not exceed 10%, depending on the value of the savings you currently hold. Additionally, you may want to invest your stock portfolio into “value” stocks which are large mature companies which pay high dividends, as opposed to “growth” companies which reinvest dividends and which may be exposed to a higher degree of volatility than “value” stocks. Talk to a broker to construct a value-driven portfolio. The other 90% or so of your portfolio should be invested in fixed income securities, such as a money market account or long-term bond. Once these investments are held to maturity the value of your investment is protected and not exposed to market volatility. However, it is possible that interest rates on TT dollars may fall further in the money market so it may not be wise to invest in a Money Market Account whose interest rate floats with market conditions.

Rather, you may want to lock in a yield from now for a ten or twenty-year period since rates may fall over that time period. For example on some Government of Trinidad & Tobago bonds the minimum investment size is $100,000 and the rates range between 5.9% and 6.4% currently. Every six months investors will receive interest proceeds of about 6% annualised over the holding period. There are other corporate bond issues which may pay higher and have smaller minimum investment sizes. Talk to a broker to get a list of the bonds available to you.

Q. I know mutual funds allow people to invest by putting aside a little money on a regular basis, but if I want to invest directly in the stock market is there any system that allows me to start with maybe $2,000 and then add a few hundred every month?

Ravi, Cunupia

A: Definitely, you can invest an initial amount in the stock market and then put in incremental amounts as you accumulate. In fact, this may be quite a good way of investing as it may result in something referred to as dollar cost averaging. This refers to the process of buying shares at different prices, which in a rising price environment would result in an average cost for the portfolio which would be lower than the price that the share eventually increases to.
Therefore even if you buy shares at a high price the overall average cost would be lower resulting in an overall profit on the transactions undertaken. Some brokers may offer a facility where the funds may be housed in a money market account while the shares are being purchased. In this way the client does not lose out on interest while the broker is sourcing the shares for purchase. Some clients may even elect to set up a standing order with their bank to credit such an account every month with a fixed amount. They would then give instructions to the broker to invest these incremental amounts into shares mutually agreed upon or, in some cases, at the discretion of a portfolio manager in the brokerage firm. This is one of the advantages of stock market investing as opposed to other “equity type” investments such as real estate where very large amounts must be invested at one time. In the stock market, an investor with a much smaller amount can earn “equity-type” returns without having to accumulate large sums which they may not have or not in a position to borrow.

Q. I have a very small business that needs to expand, who can I get to help me put together a loan proposal for the bank?

 Donald, Arima

A: The Business Development Company Limited (BDC) was set up to facilitate small businesses in an effort to obtain financing. The BDC will assess the viability of the business project and issue a guarantee up to 85% of the financing requested subject to a maximum amount. In the majority of cases the amount guaranteed is about 50% of the amount BDC deems acceptable. The BDC also assists the business owner in developing a loan proposal or business plan. There is a “business plan” form at the company’s offices which can be purchased at a cost of $5.
On this form the business owner must provide information which is used by the BDC in assessing the viability of the project. BDC officials provide assistance in filling out this form which would eventually be used by them in making the final assessment. So a loan proposal is not difficult at all as it is preformatted by BDC in addition to which BDC officers provide guidance. Once a guarantee is obtained one can approach a commercial bank in order to obtain the financing. However, the borrower would have to provide collateral requirements for the residual amount of the loan not guaranteed by BDC. This would be determined solely between the borrower and the banker.