FINANCIAL NOTEBOOK

Q. I’m in my late fifties and my wife pointed out last week that I haven’t put anything aside for retirement. I began to panic. How can I get into some really fast growing investments so as to have something stashed away when I quit work?
Sean, Fyzabad

A: Generally, the closer an individual is to retirement the more conservative should be his or her investment strategy. At this stage you are more concerned with income preservation rather than wealth building as the latter is inherently a risky affair, especially since in your case, you have less than ten years before retirement. Having said that, investors in Trinidad & Tobago are unusually lucky. Due to significant growth in the petrochemical sector over the years and high expected Foreign Direct Investment flows in the future, the local stock market has been going up even while markets all over the world are falling. Therefore, you may want to allocate a percentage of your portfolio to the local stock market.

However, it would be extremely risky to choose stocks at this stage. What you want to do is invest in a diversified basket of stocks rather than a mere handful of stocks. Some brokers can allow you to buy an investment that mimics the investment of the local stock market as a whole rather than that of a few shares. For example, there could be an investment that allows you to buy the composite index, which tracks the value of the stock market as a whole. While the return on such an index might be lower than picking a few shares on which a good broker is most optimistic, buying the market “as a whole” may offer a less risky strategy for you since you are close to retirement and cannot afford to lose much. The return on the composite index over the past ten years has been about 19.0% per annum on an annualised compounded basis. Most analysts expect that the composite index may perform at 13-14% in 2003. Such index instruments may not yet be available everywhere, but brokers are working towards creating them and quite likely would be on offer in the not too distant future.

Q. I can put aside about $800 a month. Would it be better to put it all into one money market account or should I put $200 into four different funds offered by four different institutions?
Jasmine, Santa Rosa

A: There are advantages and disadvantages to both and the answer really depends on your view on the soundness of the respective institutions, as well as the effective return (after any fees) offered by the money market account and the four funds. Putting all your money into one account means that if for some reason that institution fails or that account underperforms, your entire investment fails or underperforms. By putting your money into four separate funds, you receive the benefit of diversification, which reduces your risk of loss or underperformance. This is because it is less likely that all four funds or institutions will fail or under-perform at the same time.

If you have determined that the money market account and the four funds all offer the same effective return net of fees, it would be better to put your money in the four separate funds as opposed to the single account, since your risk adjusted return will be better by using the four funds.  Remember there are two sides to any investment — risk and return. In the case where you have the same levels of return being offered, what you want to do is minimise the risk. In the case where you have the same level of risk involved, you would want to maximise the return.

Q. What is the difference between investment banking and ordinary banking?
Sudesh, El Dorado

A: A major difference has to do with the term or period of the associated loans and investments. “Ordinary” banking relates to loans and investments of a short-term nature such as short-term deposits, short-term loans for working capital and overdraft facilities. Investment banking relates to longer-term loans and investments and is associated with the financing of longer term assets such as property, plant and equipment. Investment Banks also help companies and governments issue securities, help investors purchase securities, manage financial assets, trade securities and provide financial advice. Investment Banks fall into large, medium or small bracket. The small, specialised firms called boutiques are oriented toward bond-trading, Mergers & Acquisition (M&A) advisory, technical analysis, etc.

Questions can be sent to PO Box, 1830, Wrightson Road, Port-of-Spain.
E-mail :cmmbsecurities@mycmmb.com