This is the final article of six, published between October 2 and 7, in support of the Bermuda Stock Exchange World Investor Week Quiz Challenge. Each article has a question embedded. Find the question and send your answer to email@example.com. Those with six correct answers will be entered into a draw to win a grand prize of a $2,500 Bermuda securities portfolio.
Back to the basics. Every day this week, The Royal Gazette has featured both local and international investing and economic experts on various investing strategies.
The thought of investing is intimidating because it has always implied having a certain esoteric knowledge. Anecdotes from RG readers and others have for years reflected that perception: “Why should I invest when I can be just as comfortable with fixed deposits and a rent from my property? I don’t understand investing — it is beyond me. We are just getting by — we don’t have anything to invest.”
Actually, readers, we know far more that we think we do about investments, we just don’t quantify that knowledge.
So, today, let’s focus on some basic reasons for owning Bermuda investment securities.
Generally, these are some of the major things that people tend to do with their money over their lifetime.
1. Consume / spend.
2. Establish savings in bank accounts.
3. Work for income and contribute to a retirement pension.
4. Build supporting relationships.
5. Educate the children in a family and the adults, too.
6. Acquire assets, eg a home that will appreciate over lifetime ownership.
7. Invest in the local economy for daily living requirements. This means on a routine basis, hundreds to thousands of times, your everyday purchases contribute to local companies’ growth.
All of the items on this list are types of investments, except the first. You are investing in yourself, your relationships, your family, your children, your retirement, your home and your community. Many individuals, but not all, also invest in capital market securities.
However, other factors also intrude into the comfort of our lifestyles subliminally, and at times abruptly.
• Purchasing power. Bermuda’s insidious inflationary environment whittles away at the value of every dollar. Investments are one way to hedge inflation erosion.
• Bank account interest rate stagnation. Global interest rates continue to remain low to almost non-existent. When might they increase to the decades ago longed-for 7.5 per cent annual term deposit returns, if ever, is anyone’s guess.
• Rental income and Bermuda property appreciation are wholly dependent upon supply and demand in local population counts and a thriving economy.
• Diversification. Avoid concentration of risk by keeping your financial assets in as broad a range of investments as you are comfortable with, is always a good plan.
• Global and local economic shifts in investment policies, tax regulatory pressures, immigration / border control issues, constitutional reforms and the like will always have an impact on small country finances.
Why invest in Bermuda company shares?
Well, you can participate in the financial success of domestic companies by becoming an owner, not just a consumer. Three immediate benefits are:
• your purchases get you what you need while generating company profitability;
• your ownership of equity in the company returns some of that growth to you in the form of stock appreciation and shareholder dividends;
• you can achieve a long-term rate of appreciation and returns higher than bank deposits.
Let’s look at the difference between owning bank deposits and investment shares.
Historically, in hundreds of well documented charts, stock growth rate of return has outpaced inflation more than bank deposits.
Bank deposit returns are linear. What you compute is what you get.
• Deposits are held in banks (on their balance sheets) in your name, subject to certain holding requirements, interest rates and time frames.
• Interest rates are controlled by bank and market forces
• Rate of return is determined by pure math compounding, ie five-year fixed deposit of $1,000 at 2 per cent annually is: $1,000 x 1.02 = $1,020 x 1.02 = $1,040.40 x 1.02 = $1,061.21 x 1.02 = $1,082.43 x 1.02 = $1,104.08. So, what you calculate is exactly what you get, no more, but less a penalty if you cash out early. Calculations assume you can get a 2 per cent return.
• Bank deposits in Bermudian financial institution may not be protected by deposit insurance.
Investments in company equity shares, on the other hand:
• Can generate unlimited upside potential gains in holding shares of successful companies.
• Many companies reward their investors with regular dividends.
• Long-term appreciation of capital is not mathematically figured; it is driven and dependent upon performance and perception of investors.
• You have direct ownership of intangible assets, another diversification category.
• Stock performance is not guaranteed, some investments may fluctuate with decrease in value, while others will significantly increase in value depending upon multiple factors such as growth, profitability, competition, popularity, etc.
• Stock has unlimited life (almost) due to corporate structure which theoretically can never die — although some can go out of business.
• Owning stock grants certain rights of ownership in the underlying company, such as voting, inspecting corporate books, and receiving dividends.
Investing in Bermuda
Currently, the Bermuda Stock Exchange lists these main board domestic companies: Argus Group Holdings Ltd, Ascendant Group Limited, Bermuda Aviation Services Ltd, Bermuda Press Holdings Ltd, BF&M Ltd, LOM Financial Limited, One Communications Ltd, Somers Ltd, The Bank of N.T. Butterfield & Son Ltd, Watlington Waterworks Ltd, West Hamilton Holdings Ltd, Devonshire Industries Ltd, and Polaris Holding Company Ltd.
Over the years many local investors, from the young to the very elderly, have felt comfortable holding domestic stocks because they know these thirteen companies or their predecessors.
Among the data presented in the Bermuda Stock Exchange daily trade report each day in The Royal Gazette is the “PE ratio”. What does PE stand for?
Now it is your turn. You buy from most of these Bermuda companies directly, or indirectly, every day. Many of you grew up as these companies grew up.
Becoming familiar with local stocks is not the same as venturing into investing in the world of global corporate stocks. But it is a good stepping stone to building your own investment knowledge, because remember this also, everyone working here today with full employee benefits has a mandated Bermuda National Pension Scheme that is invested on a global basis.
Owning shares in a local company that provides you with necessary goods and services for your lifestyle is a great way to start investing. Learn about them, invest in them, receive the dividend benefit from them. Monitor their activities and watch them continue to succeed.
Invest in Bermuda.
Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: firstname.lastname@example.org