Bermudians use their money wisely and secure high returns on their investments. But it is not an easy task plotting a steady financial path in a depressed local and global market.

In this article, Miss Carolyn Hall, CA, who is a financial advisor with Bermuda-based investment firm First Bermuda Securities, passes on some sound investment tips.

Canadian-born Miss Hall has previously worked for Touche Ross, Merrill Lynch and in the Auditor General's office in Bermuda. She has also assisted Bermuda Police in the investigation of several financial fraud cases.

After just a few months of speaking with people about our business, it is apparent that the Bermudian public is in need of information about financial markets, services and products in order to make decisions about what products and services best suit their needs.

Until recently, Bermudians had only five primary investments from which to choose. These were real estate, insurance products, savings accounts, some local stocks and bonds and a few mutual funds. Now, with the blossoming of a financial services sector, there are many more choices available.

The decision as to which investments are best is suddenly very complex. Never before have so many choices been available to people who are accustomed to making do with what is at hand.

My recommendation is to make an informed decision before any investing is done. In this article I hope to lead you through the steps toward that informed decision.

Step 1: Identify your lifetime financial goals and prioritise them. This sounds easy but, if your goal is "to make money'' or "be a millionaire,'' that is not quite specific enough to plan towards.

Your financial goals should be specific and realistic. Most people through their lifetime have goals prioritised as follows: 1) save for the family home; 2) save for each child's education; 3) save for own retirement and; 4) preserve excess funds against inflation.

Now, consider your own personal situation. Which of the above goals are important to you? What other goals are important to you? Rank your goals in order of importance.

Please do not skip this step. A failure to identify your goals is like jumping behind the wheel of a car without knowing where you are going -- you may head west when you should be going east! Similarly, goals should be ranked as to their priority. Did you ever spend a day running errands without planning their priority? You probably ended up criss-crossing the Island.

Or you may have forgotten to tend to the most important errand only to find yourself at home after shop hours without food, pampers or some other vital necessity to carry you through the weekend.

Therefore, planning for your financial future now will help you to better navigate through bad financial weather when it arises.

Step 2 : Determine your time frame.

By their nature, your goals will often dictate a time frame (eg. retirement by age 65 or university for junior in ten or more years). If you have no savings now, yet want to reach a goal in a short period of time, which will require a major outlay of funds, your goal may not be attainable without financing.

However, if you have current savings or if you are able to set aside a given sum each month, most of your lifetime goals should be within reach. The important point is to start building now to meet your future goals. How much time will elapse before you need the funds necessary to meet each of your goals? Is the time so near for a particular goal that you need to change your priorities identified in step 1? Assign a deadline date for each of your financial goals. Shift the priority of your goals if near-term deadlines so dictate.

Step 3 : Specify your risk tolerance.

This is very difficult to do. Most of us consider ourselves either as risk takers or risk avoiders. However, we often taken action that is contrary to our image of our own risk tolerance.

A risk avoider is a person who wants 100 percent guarantees. A risk taker likes the excitement of "rolling the dice'' for the opportunity of exceptional gain. Few of us are, in fact, at either extreme of the risk tolerance scale.

As well, many of us fail to identify the risk factors of a particular investment. We make an investment without factoring in economic changes. This exposure to risk is worsened if the investment is leveraged, i.e. made with funds which are borrowed.

The best example of this are the many unfortunate souls who purchased expensive rental properties with large mortgages during the booming eighties only to find that their anticipated rental incomes are not guaranteed during a recession period such as Bermuda is experiencing now. The mortgage payments have to be met now with funds over and above the rental income receipts.

Otherwise the rental property will have to be sold for less than its market value of just a few months or years before.

Therefore, most of us take on more risk than we say we would normally be willing to accept. Let the nature of your goal and your time frame help you determine your risk tolerance for each of your goals.

For each goal, ask yourself: are you investing for a period of more than ten years and are willing to see increases and decreases in the value of your investment in the interim? Or do you need a guarantee as to the security of your investment, to meet a specific goal, and are willing to accept a return equal to or just slightly above the rate of inflation? Before any investment is made, the salesperson should inform the investor of all the risks involved.

Note -- an historical record of performance (eg. an investment that earned nine percent or 44 percent last year) does not guarantee future performance.

Many Bermudians have been duped into believing an historical return is a guaranteed future return.

A prospectus should be provided for most investments when they are first introduced. A careful review of the prospectus will outline what guarantees are or are not made.

Step 4 : Choose the investment products to meet each goal, considering your restrictions of time and risk.

As a rule of thumb, if your time frame is less than five years, you should opt for safety (such as a money market account, savings account or bond with a term to maturity that matches your time frame).

Otherwise, you would be exposing yourself to unnecessary risk of loss if you chose to invest in stocks, long-term bonds (with a maturity greater than your time frame), mutual funds or real estate.

Each of these types of investments require a time frame of more than five years -- preferably more than ten years. This is because each of these types of investments is subject to changes in the economy.

Given that an economic cycle is four to seven years, a short-term investment near the end of an economic upswing will experience the price declines that accompany an economic downswing.

If your time frame is too short to hold onto the investment until the subsequent economic upswing, you risk selling when prices are low and realising little gain or possibly a loss.

At the beginning of this article were identified the few categories of investments traditionally available to Bermudians who choose to invest locally. Let's examine each.

Real Estate Most of us dream of owning our own home. Few of us can purchase real estate without leverage (borrowing). Purchasing a house for personal occupation is usually so important a goal that most of us are willing to accept the risk of financing this purchase via a mortgage carrying a rate of interest that is higher than the rate of inflation.

We take on this risk because we believe that, over the long term, the value of the property will increase by more than inflation. Even if this does not happen, we are at the very least assured of free housing once the mortgage is paid off -- usually about the time we plan to retire and expect reduced income.

However, real estate as an investment (in addition to your personal residence) can prove to be more risky than many of us are willing to accept.

Recall the motto of "not putting all your eggs in one basket.'' If you own your home plus other real estate investments, without holding other investment assets, you will always be at the whim of the real estate market -- realising appreciation only on sales in favourable markets and possibly being forced into realising losses in unfavourable markets due to high carrying (mortgage service) charges.

In either situation, buying real estate as a residence or buying real estate as an investment, you have likely made the unconscious decision to hold the investment over the long-term (i.e. at least the 15 year term of a mortgage) planning to sell only to reinvest in another property (upgrade) to suit your changing needs.

It is when we take on a debt load too heavy to carry through the hard times that we face possible financial ruin. This applies to any type of investment, even one's business.

Insurance Products These are becoming more varied and complex as the insurance industry attempts to keep up with the changing needs and demands of their clients.

Generally, all of us need some level of insurance coverage. The amount of coverage and the specific products will often depend on our lifestyles and competing products available to us through, for example, our employer.

Insurance agents are well-versed in the rules-of-thumb of insurance. They can help us to determine our exposure to calamities -- the financial risks of which can be reduced by appropriate policies tailored to ensure minimal financial losses.

Insurance is the best method to secure a financial commitment you have already made (eg. mortgage insurance) or one you take for granted (eg. salary protection).

The returns on some insurance investment products are known and stable but rarely guaranteed beyond the first year. This provides limited security (eg.

usually a four percent per annum return) but will not allow for the potential of higher gains that are available through investing in real estate or stocks.

As well, some of us want the flexibility to liquidate our investments at a minimal or nil charge: not all insurance products have this feature.

Therefore, after most known calamities have been covered by insurance, most of us look to other means of investing which provide us with greater liquidity and the possibility of greater returns.

Savings Deposit Virtually all of us need a bank account. This is the first step towards building a relationship with a financial institution which is important for our future credit rating.

Financial planners usually say, as a rule of thumb, that we should keep three months' salary on deposit in case of an emergency such as temporary unemployment or underemployment.

A savings deposit is perceived as the most secure investment but there are a couple of major drawbacks.

Most of us have learned the hard way that the higher the return on a deposit, the longer the period we are "locked in.'' This locked-in feature will defeat our efforts to have cash on hand in the event of an emergency.

The other drawback of savings deposits (and most interest rate vehicles) is that the interest rate may be little more than the rate of inflation. In other words, growth is minimum. This is the price (opportunity loss) of having a guaranteed, 100 percent secured, investment.

Consequently, only the most risk adverse individual will put all of his/her savings on deposit.

After securing home, insurance, and rainy day money, most of us are willing to accept some measure of risk in exchange for greater returns. Therefore, we look to stocks, bonds and mutual funds.

Bermuda Stocks and Bonds Many people have been reluctant to purchase Bermudian stocks and bonds. The reasons most often given are -- "local stocks and bonds are stagnant'' (the local stocks and bonds have appreciated very little over time when compared to overseas markets); "there aren't enough local stocks and bonds available to purchase'' (all the best investments are held for the long term and are rarely available for sale); "one has to wait weeks to execute a purchase or a sale''; and "I don't understand the stock and bond markets.'' All of these concerns are real. Except for the last point, each of these problems are specific to the Bermuda Stock Exchange.

Take comfort in knowing that, in the not too distant future, the local stock exchange will be greatly improved, with daily trading of securities.

Consequently, investors will not have to wait a week to buy and sell. This increased activity will soon allow the untethered forces of demand and supply to bid prices up and down.

Therefore, the good investments will increase in value and the poor investments will decline in value (this latter case seems to have happened already).

There is a risk of buying just one or a handful of stocks called systematic risk. Basically, this is the risk that the stock you buy represents a company or industry that is in an economic downturn and will decline in value.

By buying between 12 and 18 stocks, capital market theorists believe you will reduce this systematic risk by 90 percent. Therefore, a variety of stocks (i.e. a diversified portfolio) is necessary to minimise the risk of loss due to economic recessions and other business sector difficulties and, because of this, the diversified portfolio is an expensive investment.

Bonds guarantee a specified interest rate over a specified period of time.

However, over the life of the bond -- both its yield (interest in dollars divided by current price) and its price -- can vary.

As a result, the guarantee is only good if the bond is held to maturity. If interest rates increase after the bond is issued, then the price of the bond (in an efficient market) will decline such that its current yield equals current interest rates available on similar quality bonds.

The converse is also true. As interest rates fall, bond prices rise. Thus, bond portfolios have recently shown tremendous returns because the values of the individual bonds increased.

It is important to note that these returns will be realised only if the bonds are sold when interest rates are still low. Investors are often reluctant to do this, though, because they cannot at the time reinvest their proceeds in any other high yielding instruments given the low prevailing interest rates.

Mutual Funds These are managed portfolios, of which there are several thousand available around the world. Most are available to Bermuda but, until now, have not been marketed here.

Consequently, only a few and often poor performing mutual funds are known locally. If one chooses to invests in stocks but has insufficient funds to buy a variety of stocks and achieve a diversified portfolio, the mutual fund is the best way to participate in the opportunity of above average returns while keeping risk to a minimum.

Mutual Fund portfolios can be one of a variety of types available. Equity (stocks), debt (bonds), money market, managed currency, and balanced (stocks and bonds instruments) are the most common.

The mutual fund to choose is the one that best meets your requirements for safety and returns. Equities give the highest potential for above average returns and government instruments (bonds and other shorter term debt offerings) give the highest security.

Remember, like real estate and stocks or bonds held directly, mutual funds should be held for a number of years.

Foreign Investments Stocks, bonds and mutual funds have already been discussed. These are the most common foreign investments now available to Bermudians. The decision to buy local securities versus foreign securities is a personal one.

If your goals in step 1 indicate that you will need foreign currency (eg.

education or retirement overseas), then the sooner you purchase foreign investments, the less likely you will be at risk of experiencing a foreign currency exchange loss (the risk that should the Bermuda dollar one day float on international currency exchanges and be forced to a value below par with the US dollar due to supply exceeding demand at the time you convert your funds).

The other reason one may wish to invest overseas is that the markets are more liquid than the Bermuda markets are currently and returns have historically been much higher. Conclusion After buying your home and insuring yourself against the dangers to you and your family, you should start saving towards your other financial goals. If you plan to save towards a financial goal over the next five, ten, fifteen or more years, you will appreciate a greater return in equities than in a savings account.

For optimum returns, you should combine your investments in a balanced portfolio -- a combination of equities for growth and debt instruments (eg.

bank deposits, bonds, T-Bills, money market funds, etc.) for security.

The portion of your savings that you should set aside in each of debt and equity instruments is dependent on your financial goals, your time frame and your tolerance for risk.

Once you have identified and prioritised your financial goals, you should meet with a financial advisor.

At that time the two of you can review your time frame, currency requirements and tolerance for risk. Those factors will assist your financial advisor in identifying the best investments for you to meet your financial goals.

MISS CAROLYN HALL -- `Investiment decisions are suddenly very complex'.