KINGSTON, Jamaica – One of the biggest financial mistakes you can make is to lack clarity in your savings and investing decisions.
The current financial news shows what can occur when obviously poor decisions are made. Yet, many remain blissfully unaware of the consequences they face from similarly bad decisions that have not generated dramatic headlines.
“The number one rule in your financial affairs is to keep it simple,” says Jerrold Johnson, Financial Advisor at JN Fund Managers (JNFM.) If you are saving, you need to have a plan which works well in Jamaica’s challenging financial climate.
“Regularly setting money aside with some general goals in mind is not enough,” Mr. Johnson adds. Smart saving requires a basic understanding of your operating environment.
Pre-Independence Jamaica was a good training ground for savers. As part of the British Empire, Jamaican savers could benefit from the stability of being part of the Sterling currency zone.
The Jamaican pound, the official currency of the island between 1840 and 1969, proved an attractive currency for savers. As it maintained parity with the strong British pound, it allowed savers to store away money for significant periods without too rapid a loss in its value.
Then came Independence and everything changed. The loss of the Sterling cover after 1969 meant that saving became more hazardous to financial health. From its original on parity level, today the British Pound is equivalent to nearly J$130, and this despite the fact the Sterling itself has also fallen from its 1969 level in real terms.
A common mistake made by many savers who face a sliding currency, is to be tempted to consume all their current income. Jamaicans now put away an inadequate amount to secure their own and the country’s future.
A 2003 study of Jamaica’s savings trends by Professor Neville Duncan of the University of the West Indies (UWI) showed the savings rate was less than 20 per cent of the Gross Domestic Product. The study showed the savings rate needs to be doubled for the country to achieve social transformation and development.
Professor Duncan said a successful country such as Singapore had achieved a savings rate of 55 percent of Gross Domestic Product. To boost the local rate he suggested that the government should seek to enhance the development of capital markets and find ways to increase the return on savings.
Dr. Duncan’s advice serves as a useful pointer to individuals. Navigating Jamaica’s challenging financial environment requires a disciplined approach to optimize the results of savings while seeking to enhance the returns on investment.
Another financial blunder often made is by the person who approaches investing without understanding the variables underlying the investment options he chooses. He may find himself in difficulties. But this can be easily avoided.
“When you invest without sufficient knowledge of the product, your action may come back and bite you,” Mr. Johnson says. “My main job is educating existing investors and persons wishing to invest.”
Mrs. Sharon Whitelocke, Research and Development Manager, JNFM, agrees. “This is where your investment advisor comes in,” she confirms. “This professional helps clients to fully understand the various financial options available, and helps each client chart the financial path best suited to achieve his goals.”
It is generally acknowledged that for longer-term objectives, funds are better invested rather than saved as this usually produces higher returns which compensate for considerations such as inflation and currency depreciation. For the period 1997-2007, inflation in Jamaica averaged 10.5 per cent per year. For the same period, the Jamaican dollar depreciated approximately 6.5 per cent each year.
A saver might be satisfied earning 8 percent per year on deposits, because the focus is to amass a certain capital sum in a specific period. For an investor with a longer-term perspective however, this could be highly unsatisfactory.
“Saving is a method of storing money for short-term needs such as paying school fees,” explains Mrs. Whitelocke. This requires that the funds be easily accessible and, given the short-term needs, not much risk is desirable.
Many savers do not understand the real cost of keeping money in low earning deposits for lengthy periods. At the same time many investors do not have a clear understanding of the relationship between risk and reward, another potential landmine.
To make real gains, an investor often has to take on greater risk. That risk may be lowered by diversifying his investment portfolio. It is in attempting to diversify that many commit other financial blunders.
One simple strategy could be to buy into equities invested mutual funds where a few of the returns are now in the range of 30 percent per annum. Portfolios can also be diversified into the international markets to reduce the currency risk. However, there are other considerations.
Ultimately, different people have varying tolerance levels for risk and their tolerance levels can change based on experience and their changing circumstances.
“Opportunities abound,” Mrs. Whitelocke says, “but make sure you can sleep at night with the decisions you take.”
