When mutual funds are a good substitute for a pension plan

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DATA from the Financial Services Commission (FSC) indicate that the total assets of the private pension plan industry as of September 30, 2020 stood at $639.29 billion. Thirty-seven per cent of this $639.29 billion is invested in “pooled investment arrangements” (that is, mutual funds or unit trusts). This is the single-largest concentration in any asset class.

In other words, pension fund managers primarily use pooled funds to store value and generate returns. But what are pooled investment arrangements? Why is the concentration so high? And if this is a good thing, is it possible for me to buy these investments myself?

POOLED INVESTMENT ARRANGEMENTS

Pooled investment arrangements can be thought of as a catch-all term for various types of mutual funds and unit trusts. For a refresher, a mutual fund is a vehicle that “pools” money from different investors, aggregates the funds and invests the total in different types of investments. The types of investments selected are dependent on the investment policy (that is, goals and objectives) of the mutual fund.

A frequently used comparison is for people to compare buying a mutual fund to eating a fruit salad. For example, you may have only an apple in your fridge and that may not be very enticing to eat by itself, it may even be a few days old. However, if you bring that apple to a friend’s house who has a pineapple and she has a friend who comes over with grapes and a sister who brings over oranges, then you can combine all the fruit to make a lovely fruit salad. You will probably enjoy the fruit salad a lot more than if you were to eat the apple by itself. Also, even if your apple were a little old, the taste of the other fruits would probably offset the taste. The concept of a mutual fund is not much different.

By pooling your funds with other investors you can access professional management, higher returns, and probably more investment opportunities than you would have ordinarily been able to if you invested ONLY your savings. Also, if one investment in the portfolio does not perform well (this is the old apple), your loss is minimised. Each investor who owns a share of a mutual fund owns a piece of this single portfolio.

Mutual funds are a great substitute for pension plans because there are no rules or restrictions preventing you from earning more. Many local pension plans have restrictions on the amount of United States dollars and equities they can hold – which ultimately reduce the value of your investments in the long term. This is especially relevant for commission-based workers such as real estate agents, life insurance agents or consultants who do not have the benefit of employer contributions to their pension plans. These individuals would be far better off simply buying a growth-oriented mutual fund. Another large benefit is that it is MUCH easier to track the performance of a mutual fund than it is to track the performance of your pension plan. Investment managers are required to publish performance data at regular intervals, and you can easily assess if the value of your investment is growing or declining.

Consider a mutual fund as an alternative to a pension plan — especially if you are an independent agent, contractor, consultant, or entrepreneur.

Marian Ross is vice-president, trading & investment at Sterling Asset Management. Sterling provides financial advice and instruments in US 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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