Q&A with CMMB Securities

Q. I am sympathetic towards people who get laid off and I’m not pointing any fingers, but I keep hearing people who got very large VSEP deals last year saying the money is running out and someone should give them work. While others I know, who worked at the same places, put a good portion of that money to work for them and some of that is already growing. Why so many of us afraid to make our money work for us?

Savitree, Princes Town

A: The reason is trust. Many people may not have the skills to make their money work for them, but they do not trust the financial institutions to do this on their behalf. The first question that usually comes to their mind is whether or not the investment’s principal is protected or if there is a money back guarantee. In other words, will they receive the initial amount invested if something goes wrong with the investment or if something happens to the financial institution?

Another reason may be that the concept of savings has not been practised and is thus not ingrained in the mind. Savings require giving up current dollars (by foregoing consumption) in order to receive more dollars in the future. This concept needs to be promoted in various ways, the most important of which is educating people about investment options, so that it is not seen as something far-fetched or something only “rich people do.”

It’s also possible that the VSEP workers you mention might not be saving because they need to have a lot more of their money in liquid investments since they are unemployed. To summarise, a proper plan needs to be worked out for the sum of money received. This should take into consideration the amount of cash needed on a monthly basis to meet living expenses and any near-term major purchase. The rest needs to be invested in products that will give higher yields over the long term and take advantage of compounded interest — this is how money works for us.

Q. I read in the papers that Government is worried about the state of pension funds for public servants.
 That got me thinking. I’m 35 and I have been contributing to a private pension plan. I want to make sure that when I retire or if I’m forced to retire early, that I’ll have enough to be comfortable. What would you suggest?

Dave, Oropouche

A: “Enough to be comfortable” would depend on your intended lifestyle when you retire. What you would need is an investment policy that examines your retirement needs and defines what your savings rate should be to achieve your needs, under certain assumptions. Some options available to you, outside of your pension plan, would be an annuity or life insurance payment. An annuity is a stream of equal annual cash flows, which are paid at equal intervals over a specific period of time. Among the advantages of an annuity is that it is considered to be a low risk investment and the interest is compounded. There is also a tax advantage to you. One disadvantage may be that the annuity will be subjected to inflation rate risk, which would affect the real value of the investment.

Q. The local stock market continues to be very strong and I notice the banks in particular have been moving up.
Why have the banks been showing such huge gains in recent weeks?

George, Arouca

A: The performance of the stock of various banks has been quite impressive recently. This strong performance is attributed to many factors. Some of the major banks have undertaken a regional acquisition drive as a means of achieving growth and remaining competitive. For example, Republic Bank acquired Barbados National Bank and more recently Banco Mercantil in the Dominican Republic, while RBTT has made several acquisitions throughout the region, including Aruba and the Netherlands Antilles. The consolidation of income from these various acquisitions has reflected positively on the earnings figures of the banks.

Both RBTT and Republic Bank posted strong earnings and investors use these earnings as proof of their performance and to judge whether or not they should consider investing in the particular stock. The expected performance of these stocks has created much demand for them, which would further push prices up. Trinidad and Tobago is currently experiencing low interest rates, which makes the cost of borrowing lower and results in strong credit demand from both commercial and individual investors.

All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever.

CMMB and/or it employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer or a solicitation to buy or sell.