This is the pension and investment review phase of the Bermuda 14-week financial review to improve your financial lifestyle.

As this phase of the review may be more difficult and complex for many, so we will cover it over next three weeks.

Why? Because pensions are investments.

Simply suggesting a brief review of investments assumes an understanding that many individuals simply do not have. Over the years, I still get comments from individuals such as, “Well, the investment people met us. They talked in jargon about markets, risk tolerance, volatility, some things that I really couldn’t follow, so I just picked a fund. I have no idea how well it will work for me!”

We will review a number of items, including:

• What is it? Where can I find resources to track these investments?

• Where is it?

• Is it right for me?

• How do I pay for it — what are those fees?

• How is it doing — is my money growing?

• Are all my contributions accounted for — seems like the total is less than last year?

• Will there be enough when I retire, is timeline important?

• Should I be aggressive or conservative?

• Should I be in these investments? I have a US green card / US passport.

So, before we review pensions, we are taking a quick detour to review the basic types of investments and the investing process. Sorry, but space constraints can never cover the whole investing spectrum, not with hundreds of books, websites and blogs on the internet. You see, the responsibility to learn more about your own pensions and investments is being pushed right back to you. Use the excellent investing references at end of this article. Write to me if you don’t understand, I will answer.

The Illustrative MamaZina Pizzarina Business Venture

MamaZina and her family are fabulous cooks. Heeding the advice provided in the Bermuda 14-week financial review plan, they have decided to start up a takeout and home-delivery pizza business, working at night after their day jobs. The five family members pool their cash, $5,000 each, to own a piece of MamaZina Pizzarina Ltd. (MZP)

Their $25,000 contributed capital is insufficient to start up production, purchase second-hand equipment, and float cash. Another $25,000 is borrowed from a local bank where the company (them) is liable for repayment. A cousin also loans them $20,000. Initially, the business will operate from the stand-alone garage on MamaZina’s and Pop’s homestead, conveniently located on a main road.

What do the five family members now own, and owe?

There are really only four kinds of asset classes: cash, stocks, bonds, and real property (tangible) attached or derived from the land. All other types: derivatives, hedge and mutuals funds, futures, options, collateralised mortgage obligations, structured notes, etc, are just percentages of these four in different combinations.

A stock (share) is a percentage ownership (equity) of a company.

As an example, if you owned 200 shares of international carmaker Toyota (out of more than 1.5 billion shares in circulation) you would have a tiny equity position; however, 200 equity shares of MZP would give you a 20 per cent ownership position.

Bonds are debt, just a more sophisticated promise (loan) to pay back with interest what you as a creditor have loaned out to a company, or a country. Plain and simple. No matter what capital markets say about yield, pricing, your concern is liquidity and credit quality. Will you get your money back? Bond investors never own any part of a company when holding a bond — you are just a creditor. You want the money you loaned to be repaid with interest.

MZP owner shareholders do not own any bonds (even an informal loan), they bought equity into the company, while their cousin and the local bank loaned the company cash infusions. Their bondholder (creditors) expect the company to pay back the loans (bonds) with interest.

Thus, the answer to the question of what the five family members own or owe is that they own equity shares in a new company. They have cash to start the business. They own the real estate where the business is situated. They own three of the four asset classes.

They also owe two liabilities as the owners of the corporation, namely the loans made to the company by their cousin and the bank.

The one big difference between the MZP shareholders and an individual with an investment portfolio, is that the individual (you with a pension) also own debt. Your investment manager purchases debt securities for your portfolio, along with equity (share) securities and other positions as listed above.

What is in your pension? Generally, your pension investments are managed as mini-portfolios, that is a mixture of various kinds of stocks, bonds, money market funds, cash, possibly an assortment of real estate investment trust funds, and much smaller percentages of commodities, such as mortgages, mining companies, gold, food, oil are put together, then invested in capital markets.

All investments have risk, some are far more risky than others. The degree of risk drives the percentage of the allocations to various single security positions within the portfolio.

The return on your investments over the long term is generally determined by the amount of risk you feel comfortable accepting.

The Bermuda Government is heavily weighted down by debt, foreign dollars mostly loaned by foreigners, as we all know. Institutional investment firms buy debt, such as Bermuda’s, for positions in their portfolios. Wouldn’t it be ironic if our Bermuda pension investments held bond positions in our own government debt?

To be continued next week.

Sources and references:

Starting up a business: the Pizza Delivery Business Plan

http://www.bplans.com/pizza_delivery_business_plan/executive_summary_fc.php

We will be referring to MamaZina Pizzerina’s company in the five weeks remaining in the Bermuda 14-week financial review plan. If you are interested in starting a small business, take a good look at the website called BPlans — starting a business made easy. It is a very comprehensive website that includes all items that you need to structure the business for free. You can also purchase the software for $12 a month.

Investing 101: http://finance.yahoo.com/education/begin_investing

http://www.investopedia.com/university/beginner/

• Martha Harris Myron CPA PFS JSM, Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, https://americansabroad.org/. The Pondstraddler* Life™ Consultancy providing financial planning, publications, presentations for Bermuda residents, their multinational families and connections. Contact: martha@pondstraddler.com