QUESTION: I am a recent university graduate and my only current financial goal is to save as much money as possible. I save $20,000 per month split between a five-year investment account, a money-market savings account, and a small sum in a credit union.

On the other hand, my sister will have to repay her student loan in three years. We have some money (not much) that we want to invest for her that will assist her in her repayment at the end of her studies.

How do I maximise my savings? I was advised to buy stocks. I have done a little research, but I am not sure which are the best stocks to buy. I would describe myself as a moderate risk taker. Please advise me on what my best options might be.

- C.J.

Three ways to improve your returns are by investing in tax-efficient instruments, high-yielding interest-bearing securities, and securities that appreciate in price.

The five-year investment account (long-term savings account or LSA) is a tax-efficient instrument but you are obligated to leave your funds undisturbed for the full five years, may not withdraw more than 75 per cent of the interest earned in any period, and are limited to depositing $1 million to the account each year to benefit from its tax-free status.

Competitive yield

The money-market savings account, which derives its yield from a basket of short-term interest-bearing securities, gives a competitive, but not the best, yield, as you can see from the accompanying tables.

The yields of such accounts may lag behind current rates when interest rates are rising, because they reflect the overall returns on all the funds in the portfolio on a particular day.

You have not said if the funds in the credit union are in a share account or some form of savings or deposit account. Each has its own purpose and return implications.

So far, you have no stocks in your portfolio to generate capital appreciation or to enhance its tax efficiency. Consider the following when you choose to invest in stocks.

A low-priced stock is not necessarily a cheap stock. A stock that has seen recent significant price appreciation is not necessarily the one to buy. A company that did well in the past will not necessarily do well in the future.

When you buy equities, you become a part owner of the business. Buy companies, therefore, that are managed well, that earn good profits consistently, that have a healthy balance sheet, and have a strong position in the market. You have taken the right approach to a likely foray into stocks; you have done some research.

Consider the following, though. Stocks pose a liquidity problem. Sometimes you cannot sell when you want to. As a small investor, you may not have the required resources to take advantage of diversification. Consider your inexperience as well.

The unit-trust option, though expensive because of the management fees charged to the funds, compensates for some of the shortfalls of stocks. It is liquid. It facilitates small investments, ease of management, and diversification, which is a useful risk-management tool - and may give very good returns.

For guidance on the best stocks to buy, consult at least two of the stockbroking, asset-management, investment-management or portfolio-management companies listed in the Yellow Pages under 'Investment'.

Alternatively, ask persons you know to have done business with some of these companies to recommend one or two.

It is not advisable to invest money required to repay your sister's student loan in an LSA because of the five-year time requirement.

Sacrifice

Consider income and safety of principal as major objectives for saving to repay her student loan. This means sacrificing the big gains you could make from capital appreciation.

Considering the risks of losing some of your principal and liquidity constraints, equities are not suitable for her portfolio.

Examine the table for guidance in selecting instruments that offer safety of principal and reasonable yields. The rates are based on a sum of $50,000; and repurchase agreement (repo) and Treasury bill returns are stated before dealer fees are applied.

The unit-trust yields relate to the twelve-month period to February 29, 2008.

Oran A. Hall offers free personal financial advice and counselling. Email: finviser.jm@gmail.com