Two years ago, I had a theory of how a stock portfolio could be constructed. But instead of going for individual stocks, I wanted exposure to international markets to adequately test my theory, without having to invest in each market separately.

The investment product that matched my needs is called an exchange traded fund (ETF). An ETF is just like stocks, listed and traded on different financial markets like the New York Stock Exchange. What makes an ETF different though is that it is market-focused or sector-focused.

Examples of market-focused ETFs — an ETF that mirrors fluctuations in Tokyo’s stock exchange by investing in stocks listed on it, or one that tracks Saudi’s stock market index. Examples of sector-focused ETFs: an ETF that invests in health care companies in the US or in the Eurozone’s banking sector.

The best part about an ETF is that you do not need to do your own analysis of companies and markets. Instead, ETF-offering companies like BlackRock and Vanguard conduct their own analysis of different stocks, deciding on the weight of every stock in a single share of an ETF.

Your decision is then to decide on what sectors or markets you would like exposure to. Not only that, historic data for ETFs is publicly available, going back as far as before the 2008 financial crisis. This gives you the opportunity to see how well an ETF has been performing over the years, for instance. (Please note here that past performance does not necessarily predict a future one.)

ETFs are the first out of four investment options that I would like to explain in this article, in an effort to help guide your approach towards constructing your own portfolio. So, for a mid-career person with some spare cash to invest, what should your investment strategy be like?

To answer that, you must have an initial idea of the average rate of return you seek and how much risk you are willing to take to attain that. As your current and future needs evolve, your investment strategy must evolve with it.

That being said, I will now elaborate on the three other investment options, which like ETFs, require low maintenance in terms of time and effort — no fancy operations and napping pods that is.

The second option is stocks listed in your country’s markets. Your exposure to the economy — and the performance of the various local companies in it — is your advantage here. This is of course subject to you following what that company is up to in terms of announcements and its general financial health.

In the UAE’s case, for instance, a UAE-based bank sits on a massive cash pile, which provokes two questions. Is the bank going to distribute some of that to investors? Or is the bank going to invest in expanding the bank’s operations?

At the time of writing, the bank that I am referring to had plans to acquire a banking subsidiary in a foreign country. Also, that same bank is historically known for paying good cash dividends — return on investments in the bank’s stocks. What I mentioned is nothing short of an embodiment of a company’s healthy operations, with promising prospects.

Another example would be to drive around, observe, and take note of what you see. Unfinished projects or ones running behind schedule are unhealthy operations for real estate developers, and signalling upcoming trouble for their stocks.

John Maynard Keynes put it best when he said: “As time goes on, I get more and more convinced that the right method in investments is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.”

In addition to the above UAE-based examples, there are also stocks offered by co-op unions in the different emirates. Those, except for one, are not listed on Dubai Financial Market or Abu Dhabi’s stock exchange and are ideal for individuals who would like to park their cash somewhere safe, while booking an annual return that exceeds what you would get on bank deposits.

There are, however, two setbacks for investing in such stocks. 1. The pricing mechanism is not market-driven, i.e., through traded transactions, but rather by individuals. 2. Ownership of the stocks are confined to UAE-passport holders within the same emirate where the co-op is based. That is, I cannot invest in co-op stocks in another emirate other than my own, no matter how good of an investment I think that stock is.

The third investment option is real estate. There are different options offered by various developers to purchase an apartment, a town house, or a villa, with different payment plans over X number of years. The return on those is usually lower than that of average dividends paid on stocks, with risks that are also lower.

Out of all four, real estate requires most time and effort to manage vacancies, maintenance, etc, which could be outsourced to specialised property management companies for a fee. The problem with real estate is that it absorbs a substantial amount of cash and is relatively illiquid, especially during market dips.

The fourth and final investment option is bonds. If you seek international exposure, you could consider US Treasuries, which are the closest substitute for keeping your money in cash. Alternatively, you could go for portfolios of bonds that are offered by different banks, investments, or insurance companies.

And if you are looking for bonds offered domestically in the UAE, the examples include Dubai Government bonds, Dubai Electricity and Water Authority bonds, and even the latest sukuk — Islamic bonds — issued by the government of Bahrain.

Such bonds are sold by different banks, while some are bundled into portfolios and sold by different insurance companies. The latter offers an investment opportunity with less capital required, especially as some of the bonds listed require a significant amount of capital if purchased directly.

Before concluding, allow me to offer you two general tips before you start building your own personal portfolio. One, understand the return that you desire on your investments and the risk associated with it.

That is irrespective of the options you pick, or the local versus international exposure that you seek. Two, diversify your portfolio. You could go for 45 per cent ETFs or stocks, 45 per cent bonds, and 10 per cent cash.

You can take from the percentages of the first two to invest in real estate, but only if you got large sums to do so. Changing the percentages, or choosing what products to include in each, must be subject to the average return that you desire, the risk you are willing to take, and the liquidity level you require for future needs or emergencies.

Wrapping it all up, the investment options provided above cover a wide range of products. Real estate and domestically-issued bonds in the UAE require the highest investment capital, while stocks, ETFs, and certain bonds require much less than that.

The higher returns on stocks are a reflection of the higher risk due to price movements, which can be balanced out with the added, relative stability of investing in bonds. It is also important to try and have a somewhat international exposure.

Finally, always keep this rule of thumb in mind: if you are interested in the long-term, daily, weekly, and monthly price fluctuations, in any investment option, should not matter.

The last thought that I want to leave you with: what will you do if your portfolio suffers during a market downturn?

The writer is a UAE based economist.