Dec 12, 2008
FirstCaribbean revenue, profit diminished
FirstCaribbean Inter-national Bank Limited (FCIB) is expected to report year-end profits that have fallen off by US$80 million or 31 per cent when its earnings report becomes available.
[ more . . . ]

Dec 10, 2008
Global crisis hits Agostini’s rights issue
Agostini’s Ltd has suffered a shortfall in its rights issue which closed on October 22, 2008.
[ more . . . ]

Dec 08, 2008
BSE not fearful of crisis
THE Barbados Stock Exchange (BSE) does not foresee any major impact on its operations as a result of the global financial crisis
[ more . . . ]

Dec 08, 2008
FirstCaribbean affected by global financial crisis
THE current global financial condition has significantly impacted the net income of one the largest banks in the Caribbean.
[ more . . . ]

<< Opinions and Analysis

Using Investments to Build Personal Wealth

Quarter 1 2004 - Linkage AmCham Magazine

Building wealth is one of our most overlooked personal development tools. On a daily basis we place emphasis on diet, exercise, self help programs and the like, yet while these are all noble undertakings; the fact remains that every major endeavor that you may undertake in your lifetime will be influenced by your level of personal wealth. Whether it is buying a car, house, going on vacation or providing for your family, how you manage and invest the financial resources available to you today will be the determining factor in your ability to enjoy these “luxuries” in the future.

Most of us know exactly what is required of us when it comes to investing yet the main downfall is often a lack of discipline. Successive Finance Ministers in numerous budget presentations have all lamented the low priority that we have attached to saving and investing. That this is the case even at a time when our economy is buoyant and opportunities abound means that there can be no complaints when the rainy day sets in.

Put Your Money To Work

At the corner stone of any attempt to build personal wealth is the concept of “putting money to work”. You cannot earn from an asset that you do not own, also not every asset that you own can generate a return. Assets financed through debt introduce an additional cost called interest. Taking this point even further you should note that assets acquired for personal consumption don’t usually generate a return, rather it is investments that do.

The discipline needed to become a successful investor often lies in the development of an investment plan. The key element of the plan would be your investment strategy. A strategy is necessary because investments with higher rates of return are generally associated with higher risk. Managing the risk / return profile of your portfolio is paramount if you are to ensure a successful outcome.

The returns available on an investment asset can be classified into three broad categories:

• Dividend / Interest - Your wealth can grow by earning interest or dividends.
• Capital Appreciation - Your assets can grow through appreciation or gaining value over time.
• Tax Deferral - Your assets can grow through tax deferral. The less money you pay in taxes, the more money you'll have working for you now.

Your preferred mix of investment return will inform the types of investments that you choose to pursue. If your focus is on recurring income then the interest / dividend component of an investment will be most important. Given the fact that dividends are not guaranteed an investor seeking steady income would generally prefer bonds.

However for a large percentage of investors, especially those with a longer investment horizon, capital appreciation carries the greatest attraction. For these investors the stock market is the investment vehicle which is most likely to offer the required return. The trade off between risk and return always applies so that even though the average investor might prefer to invest in the stock market above other forms of investment they must always be cognizant of the risks involved.

Experience suggests that in the long term the stock market will almost guarantee a reasonable level of capital appreciation, however over the short to medium term the market gives a roller-coaster-type ride from time to time in the value of your investments. A proper investment strategy will lead to a diversified portfolio of shares thus reducing the risks associated with holding any one share as an investment and in the process smoothing out the up and down cycle. It is important to note that with any investment strategy you still have to make wise stock selections and keep abreast of corporate developments to insure that the selection is a bona fide long-term holding. In this regard your stockbroker is the best person from which to seek advice.

Investing on a Fixed Salary

Aside from diversification investors should also look to other investment strategies to support their quest to increase their personal wealth. One such strategy especially useful to persons investing on a fixed income is dollar cost averaging. What dollar cost averaging can accomplish is a convenient manner in which to increase holdings in specific stocks and to at the same time take advantage of market fluctuations.

Dollar cost averaging means making periodic investments of the same amount of money in the same stock regardless of whether the price is declining or ascending. The discipline here is that the called for action should be virtually automatic. The same dollar amount of investment will be made in the same security on the 30th of every month, or on the first day of every quarter or whatever interval is selected. To maintain the concept of dollar cost averaging the investment must be devoid of any consideration of the current stock price at the time of purchase.

As previously noted, dollar cost averaging is probably best suited to the investor who is investing on a fixed income or one starting to build a portfolio and does not have sufficient funds to purchase a meaningful number of shares in several companies. Through a periodic investment program he can put a given amount each month in a list of companies and obtain the benefit of not only building a sizable investment fund over time, but also of obtaining a range of prices, some higher some lower, that would provide a lower average cost over time.

As with any other aspect of investing, there are no guarantees that this will produce cost benefits. Some studies that have been done on simple investment plans have not provided conclusive evidence and there are too many variables to simplify any in-depth analysis. Yet despite all the financial considerations to the investor the discipline demanded by dollar cost averaging may be the greatest benefit for investing as in most other aspects of life, discipline is essential for good behavior!

If you do not invest from a fixed income but rather in the form of a lump sum, then the evidence suggests that there may be no benefit to dollar cost average the investment. In that case the onus is on you to seek out the information available that will allow you make the best investment decisions at that point in time.

Buy Local

Now that you have a fair idea as to what to invest in, and how to invest the next step on our road to wealth creation is determining where to invest.

In this instance the old saying “there is no place like home” rings true. The Trinidad and Tobago Stock Market and in fact the regional stock markets have recently produced significant capital growth that have no doubt increased the net worth of most of their markets participants. Taken together the Caribbean markets were among the best performers in the world in 2003.

Viewed in isolation the Jamaican Stock Exchange produced a return of 49% in 2003 followed by Barbados and Trinidad and Tobago with a 28% and 27% respective return. Compare this to the S&P500 and the Dow Jones at 26% and 25% respectively and you will see that there is great value to be had from investing in the local and regional markets.

In Trinidad and Tobago at least, this trend has continued into 2004. At the time of writing the T&T market was up 14.27% for the year. That’s the return you would have gotten just from investing in the market. Every market has good and bad stock buys. The key is to be able to separate the good from the bad. If you had invested equal amounts in the five stock picks of West Indies Stockbrokers Limited from January to December 2003 you would have generated the amazing return of 69.5% and so far for this year our picks have generated a return of 23.7%. Put another way, an investor who invested $100,000 in January 2003 and relied on our advice would have seen his investment grow to $185,780 at the time of writing!

Past performance is no indication of future success. West Indies Stockbrokers Limited does not guarantee that the market returns to date will be repeated in the future. The experience of each individual investor will be different.

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