#BTColumn – Building an investment portfolio

Disclaimer: The views and opinions expressed by the author(s) do not represent the official position of Barbados TODAY.

A caller to a talk show recently lamented the rate of return on savings. The moderator kept saying “I am not here to offer advice, but there is Sagicor, there is Fortress, there is Carilend, etc.” My friends what she was saying to the caller was “start a portfolio of investments.”

A portfolio of investments is a combination of assets that match risk and reward to earn the holder gains through growth, interest and dividends.

It may contain, in order of risk:

– Cash (including fixed deposits)

– Bonds

– Treasury bills

– Mutual funds

– Stocks

– Real Estate

– Other areas such as commodities, crypto

Some major factors to consider when creating a portfolio

– Understanding your risk tolerance

– Understanding your psychological balance

– Your age and proximity to retirement

– Income available for investment

Generally, Barbadians will say, I am not putting my money here because it is too risky. All investment assets carry some level of risk and it is the duty of the professional advisor to evaluate the individual’s risk tolerance and psychological balance to determine which investments best suit the client’s needs and risk profile.

Having money in a bank account with zero interest rate may not seem like a risk since if you put in $1,000 you can go to the bank and withdraw the $1,000 (seniors only) – others, the bank would take out charges. However, given the effect of inflation (rising prices) the spending power of that money will decline in the future. Inflation therefore is a risk. It is expected that prices generally will rise over time given several factors, but the level and frequency of the increase cannot be pre-determined, and therein lies the risk. Two recent events – COVID-19 and the war with Russia and Ukraine have impacted manufacturing and transportation costs, the scarcity in supply of various commodities; the results of which have reverberated across the world. These have all resulted in inflation.

Secondly, there are individuals who based on their net worth (assets-liabilities) can have a high-risk tolerance, but from a psychological viewpoint they are risk averse (they may go into depression based on losses) and hence their portfolio should be structured to mitigate losses.

Younger people are encouraged to have an aggressive portfolio, while older persons are asked to rebalance their portfolio to reduce risk.

Why can a younger person be aggressive in their portfolio? The reason for this is that as economies go through cycles, someone in their 20/30’s can withstand a rock bottom fall in their investments because they have another 30 years to recover. Conversely, if one is 50/60 the economic downturn may affect your retirement. It is often recommended “as a estimate “that your age is a good guide for the percentage of assets you should have in income – if in your 30’s 30 per cent be in income producing assets (bonds, treasury bills) and 70 percent in growth.

There is no magic number to having a portfolio, so someone can have a bond, cash at the Credit Union, be invested in a mutual fund or have shares. The key is to know whether the money is “excess” funds or savings used as it should not be required to pay monthly expenses.

Having examined the investment profile, we can now turn to the various instruments available. As we follow the table below, we will examine the investments moving through least risk to greatest risk. Two investments that can provide both income and growth are stocks (in the form of dividends/earnings and price appreciation); and real estate (in the form of rental income and appreciation of property).

** While Bonds are generally safe, the attractiveness of the investment is softened by any recent adverse policies e.g. debt restructuring (bonds to individuals were exempt and BOSS bonds we have been assured are safe from restructuring). Bonds also have an inverse relationship with interest rates for example, if you have a bond with a 3 percent interest rate and interest rates go to 4 percent, the value of your bond is worth less, compared to what you can get elsewhere. The converse is also true.

A conservative, balanced, growth and aggressive, portfolios are shown below:

The impact of asset allocation on long-term performance and short-term volatility

Another critical factor which assists in determining your risk is your net worth. The higher your net worth, the better you are at withstanding risk.

Harry Markowitz, known for modern portfolio theory (MTP 1952) created a formula that allows an investor to maximize overall returns, within an acceptable level of risk resulting in the ideal portfolio, i.e., diversified portfolio. Diversification (we know this from Barbadian saying – “not putting all your eggs in one basket”) is essential to portfolio management and there are numerous opportunities and strategies for diversification. It is a dereliction of one’s duty to have one stock. This was borne out by the collapse of Enron (2001) which was thought to be a strong company. When it collapsed, staff earned an income from the company, had a pension plan with the company, and all of their investments were in Enron stock. I often encourage staff at companies which offer shares in lieu of bonus to purchase some, but also spread their risk by having other investments.

One can diversify by: Asset class: cash, stocks, bonds, crypto, commodities

Region – Caribbean, Americas, Asia, Africa, Europe

Operations – hospitality, manufacturing, retail, mining, financial, real estate, commodities (list is endless)

Size -businesses listed on junior markets or small caps vs large caps.

All companies that are public entities must produce financial statements which show how the business performed for 6 months and then an audited financial statement at year-end. Furthermore, there is an annual general meeting which shareholders can attend and ask questions of the manager about the performance of the business. One can also track performance of investments through online portals which are updated in real time.

Therefore, if one has excess funds, have determined, or have a professional assist in your risk analysis, you can begin by diversifying your assets through an investment portfolio. If afraid, start with a small amount and grow from there.

Sonia Hunte is a CFP professional (Certified Financial Planner Canada)