Business

Money moves — beginner, intermediate and advanced

The Syerling Report

BY Yanique Leiba-Ebanks

Sunday, March 24, 2019

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IF you are a boxing fan, then you know that each contestant must compete in their own specific weight class.

It would not be a pretty sight to watch Sugar Ray Leonard trying to fight heavyweight Mike Tyson (of course my male colleague just reminded me that “pound for pound” Sugar Ray was arguably a better boxer than Mike Tyson!)

I have to admit that as a child I never missed boxing on a Thursday night, especially when Mike Tyson was in the ring. The fact is that in the same way you have lightweight, middleweight and heavyweight classes, in finance you have different classes which I will refer to as beginner, intermediate and advanced.

Let's discuss the characteristics of a lightweight/beginner.

Firstly, this would be a person (for the sake of simplicity) who meets two requirements. The first one is that they have a small amount to invest, ie under US$10,000, and they have limited knowledge about investments. This could be a student, or just a novice to investing.

What would be appropriate for this individual?

Collective investments such as mutual funds, unit trusts or indexed funds are ideal for beginners, mainly because these funds are managed on your behalf and, in addition, they are subject to relatively low minimums. Moreover, they do not require advanced investment knowledge and enable investors to grow their investment at their own pace — whenever funds become available.

What about the intermediate investor?

This person is squarely in the middleweight category. Remember Mike McCallum? What would be an intermediate-level investment? Bonds would definitely fall in this category as well as cherry-picking stocks (rather than approaching it through a unit trust or mutual fund).

What characterises this level is that normally there is a higher minimum to purchase a bond directly, and you need to take time to understand the bonds that you are including in your portfolio.

Stocks generally have very low minimums, but similar to bonds, you would have to do research to see which ones you should acquire (unless you are purchasing an indexed fund).

Now for the heavyweights!

This is the most exciting (aka risky) category. This is only for the advanced investor. You need to have some amount of wealth, hopefully a good amount of investment knowledge, and be willing to take risk.

The categories include: structured products, real estate for investment, derivatives and seriously distressed debt.

Did you know that there are institutions and individuals who will see that a bond has defaulted and decide that is the time to purchase it? Sometimes these bonds are trading as low as $20 (per hundred), and they gamble that the recovery rate may come out between $50 to $60. Obviously, there is no guarantee that these bonds will ever recover, but if they do, the upside is great!

In 2008, in the time of Sub-prime, structured products abounded! However, some of them were so complex that the people had no idea what the true underlying asset was.

Investing in real estate is also risky, but when it pays off the rewards can be huge.

Jamaica's market is very light on derivatives, but this may change as we become more sophisticated.

So, the bottom line is, where do you fall? Boxing above your weight class can be dangerous, so always be conscious of this before you contemplate a new investment.

Fortunately, unlike boxing in which Sugar Ray could never really enter the heavyweight class, you as an investor can move upwards as your income, your knowledge, and your ability to take risks increase.

Happy Investing!

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.


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