Q&A with CMMB Securities

Q. How do I go about setting up something like a fund for my children (aged  11  and 7) so they can get a financial head start by the time they are 18  or 21?

Sasha, San Fernando

A: There are two options you can consider.
Firstly, if you do not currently have a level of savings to start with you may enter into an annuity in which you pay a fixed amount per month. Since your children are relatively young, doing this for the next ten years or so would enable you to accumulate a significant amount over time through the power of compounding. As you may know, this results from reinvesting your earned interest and receiving “interest on interest”. You need to decide on the amount you want to have in ten years and then set aside the amount per month, which would grow to your target payout in ten years. Talk to your insurance agent to work out the installment which is necessary. Make sure though that the amount you set aside does not stress your monthly cash flow too much.

While an annuity gives an assured future payout, the rate of return you earn is fixed and relatively low. So the ideal situation would be to start an investment portfolio which, depending on the asset mix, can generate much higher returns than an annuity. However, to do this you would need to have a level of savings to start with. Once you can set aside an amount to an investment portfolio, talk to a qualified financial analyst to work out the investment strategy suitable to you. Generally speaking, since you have ten years before you need the funds, you can afford to construct an aggressive portfolio with a high growth rate. This may involve a high allocation towards investments in the stock market where the returns are quite attractive. Even though volatility exists in the stock market in the short-term, over a long period, such as ten years, there is a high probability that returns would be high. You can also use a method of investing called dollar cost averaging which can help maximise your returns.  There are brokerage firms in Trinidad and Tobago in which there are qualified financial advisors who can help you construct such a portfolio. Go in and talk to one.

Q. I hear people talk about financial independence all the time, even the politicians are using the expression, but what does it really mean? Almost everyone in the country seems to be living on credit.

Lisa,  St Joseph

A: Although financial independence may be an elusive goal it is not unattainable. Once a savings and investment ethic is developed in the early stages of life, over time, the goal of financial stability can be achieved. The process is simple. The higher the return required, the higher is the risk that would have to be taken. That’s the bad news. The good news is that risk is reduced the longer the time over which the investment is held. Therefore younger folks, with say twenty to thirty years to retirement, would want to invest a larger percentage of their funds in the stock market, which, although volatile in the short-term, can generate significant wealth over the long term. The stock market is an avenue through which you can build wealth over time.

The problem in Trinidad and Tobago is that the older generations were taught that savings only meant a savings account at the bank. They therefore lost the opportunity to start investing in the stock market early. If they had done that, over the past ten years they would have earned an average rate of 20% per year. Think about it — if you had $50,000 ten years ago you would have just over $300,000 today from leaving your funds in the stock market at an average rate of 20% per year. On the other hand, leaving it in a savings account in the bank would have increased your $50,000 to $75,000, calculated at an average rate of 5% per annum.

Also, because the purchasing power of your money is eroded with inflation, your real return would probably be 1% if inflation was 4% per annum. We in Trinidad and Tobago need to look to the stock exchange and other investment alternatives, such as mutual funds, and develop that culture in our youth.  The benefits to be derived from investments are not limited to a few, it’s a simple process which anyone can undertake and it is a good means of developing financial independence.