Our guide to investing

Once you start building your savings and have taken measures to protect your finances, you can begin considering how you can put your money to work for you.

Investing is about choosing the right mechanism to grow your wealth. When you invest, you essentially put your savings in someone's business venture with the expectation that you will gain a profit from it.

Your choice of investments will depend on your financial goals and life situation, the number of dependents you have, and the responsibilities you have to fulfill.

Do you believe you don’t earn enough to invest? The same basic principle that applies to saving also applies to investing, i.e., you can start with any amount, and the sooner you start, the better.  For instance, if you have an income of AED 20,000 per month, you should ideally save a fixed portion in a short-term savings account (e.g., AED 2,000, which is 10% of your income), spend another portion to protect your wealth via insurance plans (e.g., AED 1,000, which is a further 5% of your income) and then invest another fixed sum (e.g., AED 1,000, which is another 5% of your income) to meet a future financial goal. In this manner, you are allocating 20% of your income to saving and investments, leaving 80% for your necessities and luxuries. As your income increases, your allocation to savings and investment should also increase proportionally.

Getting ready to invest

The first steps for investing are to determine both your financial goals and risk profile.

Your financial goals depend on the expenses you foresee in both your near and distant future. Are you planning to buy a house? Do you want to get an early start on your retirement savings? Travel plans, education goals, and meeting your children’s needs all figure into the types of investments you choose.

A key point to remember when thinking about your financial goals is that they are subject to change. Your priorities are likely to shift with changes in your life situation and/or the evolution of your preferences and desires. Thus, it’s important to recognise from the get-go that financial planning has to be approached with flexibility.

Your risk profile denotes your willingness and ability to take on risk - that is, whether you should forgo the stability of your capital for the promise of high returns. A risk-averse individual is one who does not wish to see their capital fluctuate and would pass on the chance of a high return to ensure that doesn’t happen. A risk-seeking individual is one who is willing to endure fluctuations in their capital in order to earn the highest possible return.

Your risk profile is usually determined by a complete assessment of your assets and liabilities. Generally speaking, someone with multiple assets and few liabilities can afford to be a risk seeker, while a risk-averse individual will have the opposite financial profile. Knowing your risk profile is useful for shortlisting which investment vehicles are available to meet your financial goals.  

Once your financial goals and risk profile have been determined, it’s time to consider the kinds of investment you can choose.

Types of investments

While there are many ways to categorise investments, a simple way to look at them is in two groupings: contractual instruments and non-contractual instruments. Contractual investment plans are those that obligate you to invest a set amount of money per month for a fixed time period. Non-contractual plans, on the other hand, do not commit you to a preset payment schedule.

The pros and cons of contractual investments versus non-contractual ones are self-explanatory: the former offer higher returns at the cost of a stringent payment schedule, that is, there are penalties for non-payments or early withdrawal of the funds; the latter gives the investor flexibility with payments in exchange for lower returns.  

Another way to categorise investments is long-term and short-term investment vehicles. While there is no fixed definition for either type of investment, long-term investments are those that are held for durations of 30 years or more. Therefore, they are suited for financial goals that need to be met in the distant future, such as retirement.  Short-term investments, such as mutual funds, mature far quicker and are ideal for building savings for more immediate needs, such as paying for a down payment on your home.

Long-term investments are typically highly rated by investment managers for the multiple benefits they offer. They have a high probability of maximising your profits over the long holding period as your principal investment has the time to grow and the rate of return has a higher chance of outpacing inflation. Moreover, long-held funds are somewhat buffered from incurring a loss because they are held long enough to overcome market fluctuations. An added benefit of long-term investment plans is that they help instill the discipline of saving regularly since the investor is bound to make payments for a long period of time.

On the other hand, short-term investments aren’t held long enough to weather market fluctuations and yield modest returns. However, they offer you a good starting point for investing, giving you relatively faster access to a larger savings pool that can either be used or reinvested into a new fund to match your next financial goal.

Now that you have the knowledge to begin your investment journey, you can set up an appointment with our advisors for a complimentary financial assessment by simply clicking this link: https://www.cfsgroup.com/contact/.