Making that WISE investment

If you’re among the thousands of Jamaicans who joined the ranks of the unemployed in the last several months, you know how difficult it is to get by, let alone plan for your future. In addition to the loss of steady income, you may be faced with some important decisions, like what to do with redundancy money or funds you have saved over time.

Karlene Mullings - Contributed

A reader has found himself in that very position and emailed a question for our panel of experts at Capital and Credit Merchant Bank.

“I am currently unemployed and in a desperate financial situation. I have $1.2 million in an account and need to earn a reasonable income from it. Please advise me how best to invest or manage this money.”

We call on the manager of the Ocho Rios branch, Karlene Mullings, to point him in the right direction.

“This has become a typical question since the economic crisis. People want to know what their options are,” she said.

She cautions, however, that in order to give someone the best advice, she would need more information, such as his/her age, and a detailed list of their expenses. “Without knowing the reader’s age, we can’t accurately gauge things, like his timeline for investment,” Mullings explained.

Still, there are some assumptions that can be made.

Avoid risky investments

“We do know,” Mullings asserted, “that this person cannot take on any significantly risky investments, as he’s indicated that he’s in a desperate financial situation.”

Assuming he will need to keep the funds fairly liquid to meet short-term eventualities, here are the options Mullings suggests:

Fixed-income investments

Examples of these include Treasury bills with three- or six-month tenors, sale or repurchase agreements, and investment bonds. Low risk means low returns, and if he were to invest in one or a combination of these instruments, his monthly earnings may not be enough to meet his expenses.

A business venture

This option is more likely to yield higher returns, but will definitely involve more risk. It is imperative that he not invest the entire $1.2 million as start-up capital for any business. He should ensure the business venture is one where turnover is high, and returns reasonably high and fairly guaranteed. Combining options one and two: He may invest $1 million in fixed-income instruments and get start-up or additional capital from a cash-secured loan, that is, using the sum invested as security for the loan. Interest rates on cash-secured loans are always lower than those applied to business loans. The key to this option is to ensure that the business is generating a higher rate of return than what the loan is costing.

Invest and create wealth for later

Mullings also cautions this potential investor to avoid the trap of thinking only about the immediate future.

“We have to assume that since he’s unemployed, he’s not part of a pension plan, so he must consider his future,” she said. “With an individual retirement account, or IRA, offered by Capital and Credit Securities Limited, you have the freedom of being your own boss. Investors aged 18-59 can easily invest and create wealth for later. You get the benefits of tax-deductible contributions, and you grow your retirement fund tax-free.

“There are also flexible payment schedules for contributions, and free financial and retirement-planning consultations,” Mullings explained.

“If you start with a lump sum of $50,000 and invest $5,000 per month for approximately 26 years, you can earn $8.6 million; or you can invest as little as $5,000 per month without any lump-sum investment, and over 22 years, you’ll earn over $4.5 million.”

Stacy-Ann Smith, Gleaner Writer