Debe housewife Rita Chanka raised her eyebrows with a worried facial expression when she heard Finance Minister Colm Imbert yesterday mention property tax coming into effect next year.
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Moving to securities selection
Managing your money ultimately involves your building of an investment portfolio that strives to achieve your investment goals within the context of your own risk tolerance. Over the past several weeks, we have been working towards the construction of a representative portfolio for the conservative investor.
We are now at the stage where the selection of specific securities/investments would be needed to round off a portfolio to which you may be aspiring. But before moving to specific security selection, let’s take some time to reflect on the areas covered in this series thus far and how they fit together.
Recall that we would have spoken to the distinction between a passive savings culture and that of the active investment approach. We would have shown that, over the past five years, a saving culture would have generated a low level of return (approximately 1.88 per cent per year).
This was compared to an active investment portfolio, with our take on the conservative investor. Here, it was shown that, over the past five years would have generated annualised returns in excess of ten per cent, significantly higher than the passive savings approach.
Investment mindset and skillset
However, these are just numbers. In order to achieve them, one must have a certain investment mindset. This investment mindset is part of the critical discipline of investing. There may be times when returns are good, while other years may produce low or negative returns. Over the medium term, however, it has been shown that the aggregate returns from investing add far more to your wealth base. The investment mindset, therefore, is the elemental starting point.
Equally important in the journey of building an investment culture is having access to certain skill sets requisite to the investor. What do the skill sets include? We have mentioned specific areas being: constant monitoring of markets and potential investment opportunities, relationship building with a reputable, trusted and longstanding investment adviser, asset allocation and securities selection. All these skills are essential prerequisites—technical and behavioural—for building a portfolio that gives you positive returns over its life.
Next, our investment themes have focused on the following:
1. Target Positive Inflation Adjusted Returns;
2. Lengthen Your Investment Horizon;
3. Diversify Across Currencies;
4. Diversify Across Asset Classes.
On these bases, our view for a representative portfolio of the conservative investor was crafted as follows:
1. TTD Fixed Income 40%
2. USD Fixed Income 33%
3. Regional Equities 15%
4. International Equities 10%
5. Cash 2%
We are now at the stage of securities selection. Here are some of the critical questions often asked in realising the securities selection.
1. For a T&T investor, how do you access hard currency which will be required to flesh out such a portfolio? In our suggested portfolio, for every TT$100,000, approximately 43 per cent or TTD equivalent $43,000 would need to be invested externally by way of hard currency.
2. Investing internationally, how do we go about accessing such investments? There would be some need for execution services. By that, I mean if you were buying shares or bonds, for example, you would need broker support to execute transactions.
3. Where can you access appropriate investment advisory services?
4. How do you monitor and measure performance against set investment goals?
If you are a small, or an “aspirational investor”, how can you get to the point of a well-structured portfolio, as well as have affordable investment advice and execution? Portfolio construction is a work in progress, especially for the small/aspirational Investor. Regardless of portfolio size, discipline remains the most important ingredient in working towards your investment targets. As part of that work in progress, the aspirational investor should consider moving from ‘product to portfolio’.
Put differently, the goal of portfolio construction can be met by incrementally building on a suite of investment products over time. The continuous process of “pruning” this suite of products into a portfolio will help you achieve the right balance and mix as deemed appropriate. As we next move forward into specific securities selection, we will address these various questions.
• Subhas Ramkhelawan is the managing director of Bourse Securities Ltd.