Q&A with CMMB Securities

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 for me to put 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 25 years before retirement over which to generate wealth. Since you do not yet have a pool of funds, the better option would be for you to contribute to a pension fund where you set aside a small amount per month. Over 25 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.

Q. In your columns you keep advising people to diversify their investments. With the amount I earn my savings and investments are the same thing. All I can put aside is $200 a month in Units. How can I diversify that?
Jasmine, Trincity

A: It is possible to diversify your investments even by setting aside $200 a month. In fact, Units are set up for that very reason. Units contain a wide variety of underlying assets in a variety of economic sectors. When you buy units your investment returns are a composite of the performance of all the underlying assets in the trust. Therefore, if you invest in units there is a much greater degree of diversification than say investing in a savings account at the bank, where the investment is located in only one company, the bank itself. In addition to spreading your eggs in different baskets the rate of return is much higher than conventional deposits. However, not all units are the same. There is one variety where your principal is kept intact while there is another where your principal could be eroded. So make sure and ask specific questions as to which kind of investment you are getting into so as to make an informed decision. Given your situation you may not want to have your capital at risk.

Q.What is a Eurobond and what role would it play in an investment portfolio?
Vernon, Santa Rosa

A: A Eurobond has nothing to do with the currency of the European Union, the Euro. This is a common misconception. Rather, a Eurobond is a bond raised in a currency for a borrower living outside of the currency’s home country. For example, the Governments of the Caribbean can raise bonds in US dollars on the international market. These are referred to as Eurodollar bonds as they are bonds denominated in US dollars raised for borrowers outside of the United States, namely Caribbean Governments. Therefore if the Government of Trinidad and Tobago (GOTT) raised a bond on the international market in US dollars it is called a Eurodollar bond. Alternatively, if the Government raises funds in Yen on the international market the bond would be referred to as a Euroyen bond. Or if the Government raises sterling on the international market the bond would be referred to as a Eurosterling bond. Eurodollar bonds are the ones applicable to investors in Trinidad and Tobago since our markets in Yen and Sterling are small. Eurobonds are very similar to normal bonds. They are characterised by semi-annual interest payments, lump sum principal payments at maturity and terms to maturity greater than ten years. Hence a GOTT Eurodollar bond would be applicable to a corporation or individual looking for a safe, long-term US dollar investment.

Questions can be sent to: Po Box, Wrightson Road, Port-of-Spain email :
cmmbsecurities@mycmmb.com