Consumption is often considered as something bad. Consumption, and consumerism, are often discussed in derisive terms and held out as the problem in our societies today. However, consumption is an important economic activity, and consumers play a vital role in an economy. Without consumers, there could be no production! No economic activity! Businesses would close their doors, and lay off their workers! There would be nobody to buy the goods being produced and sold!
So why then are we encouraging a switch from consuming to investing? Consumption is obviously a good thing! The problem lies in our consumption patterns.
To consume, one must have spending power. One must have sufficient financial resources, that is, either wealth or income, in order to purchase the goods and services that are to be consumed. Most of us get our spending power from wages or salaries. The problem we face is that many, if not most, of us spend all of our income on consumption, and sometimes exacerbate this by borrowing in order to consume. We are basically consuming now based on our potential to earn income in the future to pay for current consumption.
While this may appear to be working now, it is not sustainable. We are not able to continue on this path indefinitely. We are all human; we will all age and at some time will be unable to continue to work and earn an income. Some of us may lose our jobs; some may become ill and lose the ability to work. Even the more fortunate of us, who may remain gainfully employed up to retirement, will have to exist on a much reduced income, even with a good pension.
Accordingly, to secure and reshape our future, our approach to consumption must change. We must begin to switch our spending pattern to reduce the amount of our income spent on immediate consumption.
The portion of your income that you do not spend on consumption, you save. As income earners, we should all try to save at least a small portion of our income. A good rule of thumb is 10%. So we should at least try to put away at least 1/10 of our income for, as our elders would say, the rainy day.
Savings could then be considered consumption deferred. That is, instead of buying goods and services now for immediate consumption, we defer this until a later date. So we keep that portion of our income until such time in the future when, based on our circumstances, we need it for consumption.
So what then should we do with our unspent income? Most of us would probably place it into a savings account at our local bank or credit union. There it would be held safely until we wish to withdraw it. The bank would probably pay us interest at a rate of about 3 per cent per annum, and have our money available to us when we are ready for it.
So by saving, we are able to put aside some of our current income in order to continue to consume in the future. However, to be able to maintain our current standard of living, or, to consume at the same rate, into the future when we may have no, or a reduced, income, we would need a better return than that offered bank accounts. We must therefore go beyond mere saving, and begin to invest, putting our saving to work for us.
Investing is the process of using money, which we call capital, to acquire an asset in order to provide a return over time, creating wealth. These assets would include things like shares in companies, mutual funds, bonds, real estate, precious coins, rare art, antiques, or even intellectual property rights. By investing, we would be actively seeking to gain a return on our money (capital), and not merely concerned with keeping it secure.
In finance, we speak of the risk-return tradeoff, which refers to the principle that the higher the potential rate of return, the higher is the risk of loss of the capital invested. The well known adage ‘nothing ventured, nothing gained’, is a variation of this principle. So, there is risk in investing, and if one can accept absolutely no loss of the capital, then one should perhaps not invest. However, there are ways to invest, and types of investment, that mitigate or reduce the potential risks, and enable a good return.
Firstly, one should only invest in those financial assets, ie shares and bonds, which are traded on a recognised exchange such as the Eastern Caribbean Securities Exchange (ECSE). Secondly, one should only invest through a broker dealer, licensed to carry on securities business by the Securities Regulatory Commission. Thirdly, one should think through clearly his/her appetite for risk. For example, one should ask, how much risk am I willing to take? Or, how much of my capital can I afford to lose without suffering undue hardship? Fourthly, one should have definite goals or investment objectives. These would help in the development of an investment strategy and a customised investment portfolio that would be appropriate to the investor.
There is a range of securities listed on the ECSE that would meet the needs of every investor. The 86 listed securities include shares of 13 domestic and foreign companies in several sectors, such as banking, utilities, telecommunications, manufacturing and commerce. That these companies are located in six different countries enables a geographic diversification that cannot be replicated in the entire Caribbean. The 73 fixed income securities consist of eight corporate bonds issued by two companies, and 65 sovereign Treasury bills, notes and bonds, issued by six ECCU Governments, spanning a spectrum of maturities from 91 days to well over 30 years. This again would enable an unrivalled degree of diversification for any investor.
The ECSE has a network of intermediaries that are located in five countries to provide access to the market to investors. These broker dealers, ABI Bank Ltd, Bank of St Vincent & the Grenadines Ltd, ECFH Global Investment Solutions Ltd, First Citizens Investment Services Ltd, National Bank of Anguilla Ltd, St Kitts-Nevis-Anguilla National Bank Ltd and The Bank of Nevis Ltd, are all licensed by the Commission, and have trained staff, also licensed by the Commission, to provide investment advice and assist investors to participate in the market. We encourage you to visit one of these broker dealers, who could assist you in making that switch – from consumer to investor, in order to reshape your future, starting now!
This article was submitted by Trevor Blake, General Manager, Eastern Caribbean Securities Exchange as part of the activities commemorating Financial Information Month, October 2013, celebrated under the theme “Reshaping Our Future – Starting Now”.