Investing money in Jamaica
Investing in plain terms is putting or placing money in something (normally a security like stocks, bonds or packaged investment products) with the expectation of receiving a return (profit) on it. Generally, persons view investing as something done by the more affluent. However, this is something that everyone should do in some form or the other. It is important that persons know why they should invest, how they should be investing money in Jamaica and what investments to buy based on their budget and investment goals.
If you are looking on how to begin to budget and save money look at my previous article here.
Considerations for investing money in Jamaica (Portfolio Management)
One of the first steps to take before investing is to determine your risk profile. This determines which types of investments you will be pooling your money into. See the table below for a quick generalisation of investor asset portfolio allocations.
|Type of Portfolio||Cash Deposits/Equivalents||Sovereign Securities/Bonds||Stocks||Description|
|Very Conservative||100% - Cash Deposits||0%||0%||This investor invests saves all of the portfolio in cash deposits, it also has the added benefit of being fully insured by the JDIC (Jamaica Deposit Insurance Corporation).|
|Conservative||5-15%||70-75%||15-20%||Investopedia describes the conservative investor as wishing to preserve a large portion of the portfolio's total value, but willing to take on a higher amount of risk to get some inflation protection.|
|Moderate||5-10%||55%-60%||35%-40%||Investopedia describes the moderate investor of having a balanced portfolio that is best for investors with a longer time horizon (generally more than five years), and a medium level of risk tolerance.|
|Aggressive||5-10%||20-25%||65-70%||Investopedia describes the aggressive investor of having a portfolio mostly of equities as their main goal is to obtain long-term growth of capital.|
Another step is to determine your investment acumen and how willing you are to continually research each security in your portfolio. This will impact the amount and type of securities you buy directly or indirectly. See the table below details.
|Managed Portfolio||Structured Products in Portfolio|
Managed portfolios (portfolios that buy securities directly) are generally limited to wealthy investors or advanced investment knowledge. If you are investing money in Jamaica but you have a relatively small amount of capital, this may not be the best option because of the fees that the portfolio manager may charge. Instead you may consider other products such as unit trust or a pooled investment scheme (not a ponzi scheme however).
Determine which securities or investment products to purchase
Buying Unit Trust / Mutual Funds
Pooled investments such as mutual funds, unit trust or structured products usually overcome these barriers (high entry cost, lack of diversification, elevated level of technical expertise and in some cases liquidity) by allowing smaller investors to ‘pool’ their monies together into a pool that is normally managed by an appointed investment professional.
The disadvantage this brings is that you normally have little control on the composition of the portfolio. However, this can be mitigated by investing in multiple unit trusts that specialise in asset classes with a similar amount of risk (for example a unit trust of Venture Capital equity investments).
An individual with a moderate risk profile could structure their portfolio based on various unit trust and or structured investment products to get their preferred portfolio allocation without having to directly invest in the asset. This has both good and bad implications; owning the investments directly allows an investor to have direct claim on any returns (some unit trusts automatically reinvest interest and dividends) and they won’t have to worry about the winding up of the fund but on the other hand the investor will likely have a diversified group of investments that they wouldn’t otherwise have if they invested directly (as they won’t likely be able to afford to invest in a substantial amount of securities).
Barriers to Investing
Generally, holding direct ownership of securities such as stocks or bonds are relatively expensive as the minimum requirement is often a large lump sum payment (JMD 100,000 or USD 1,000) or the fees for purchasing small quantities are relatively high. In addition to that, securities such as stocks (See my article on Buying Stocks in Jamaica) require you to actively monitor the movements in the secondary market (stock market) along with having to monitor the financial state of the entity who issued the stock (although other investments such as bonds should also get a similar level of attention).
Bonds also have a secondary market (the stock exchanges are secondary markets were investors trade with each another), however it is not as critical for all investors to participate in this market as the bond issuer is contractually obligated to provide the investor with interest payments (and eventually the principal amount) whereas investors in stocks only receive returns by sale on the secondary market, though company buy backs or dividends (which is up to the decision of the company board).
Lastly it is also important that your portfolio is adequately diversified so your assets do not react to an event in the same way (e.g. fall in oil prices). If your assets are very similar in nature or you have a few investments that take up a large portion of your portfolio then there is a large risk that when that particular asset or company is not doing well then your entire portfolio will not do well.