Q&A with CMMB Securities

Q. I keep hearing people in the finance business talk about hedges — like hedges against inflation or hedge against devaluation — what are they talking about?

Claire, St Augustine

A: The easiest way to think about hedging is as a form of insurance. When investors decide to hedge, they are insuring themselves against a negative event. By insuring themselves, they do not prevent the negative event from happening, but if they are properly hedged, the impact of the event is reduced. For example, if you buy house insurance, you are hedging against fires, break-ins, or other unforeseen disasters. In financial markets, investors can also immunise themselves from the impact of negative financial consequences. Hedging against investment risk means tactically using techniques in the market to offset the risk of any adverse price movements in the investment. In other words, investors hedge one investment by getting into hedging instruments. Of course, you have to pay for this type of “insurance” in one form or another. Paying for this insurance would therefore reduce the effective return on your investment, but reduces the risk that you face from adverse price movements.
So, hedging is a technique not by which you will make money, but a strategy by which you can reduce potential loss.

Q. Someone told me that rich people don’t have pension plans, they live off the interest on their investments.
I’m 35, is it better to put my money in a pension plan or should I build an investment portfolio for my retirement?

Satish, Chaguanas

A: It is true that rich people can generate a significant monthly income because they already have amassed a significant amount of capital. However, if you are 35 and do not yet have significant savings, you still have at least 25 years to generate wealth before retirement. Since you do not yet have a pool of funds, the better option would be to contribute to a pension fund where you set aside a small amount every month. Over twenty-five years you would be able to contribute to a substantial target payout in order to live comfortably during retirement. Most plans are structured so that you would receive a lump sum payout on retirement and then monthly income flows. There are different ways in which the payouts can be structured to suit your individual circumstances, so talk to a qualified financial planner to get a few options or to customise the cash flow to suit your preference. Obviously, the more you can afford to contribute to your pension plan each month, the greater would be the amount you get at retirement.

Also, the higher the interest rate that you earn on your contributions the greater the income at retirement. So make sure and shop around and get the best possible return on your funds. In wealth building all you need is time and a good rate of return. “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 its 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.”