New investors should set clear goals, not try to get rich quick
Part 3 of series on what you need to know to start investing
Dubai: Before you start investing, be it for an upcoming vacation or retirement, market experts urge that any beginner investor should have clear goals in mind, including finding out how much risk can be taken on.
What you plan on using the money for will help you choose the type of investment and help you determine how much risk you feel comfortable with, all while keeping in mind that the longer you have to invest your money, the bigger the risks you can handle.
“Shares might be a little bit riskier than, let’s say, bonds,” said Anita Yadav, a seasoned markets expert with experience in diverse financial markets. “Investing in real estate maybe safe but it’s illiquid versus bonds and shares.”
“If you are young and can afford to take risk then you should focus your portfolio towards shares, but if you are a little bit older and want safer options your portfolio should be more skewed towards bonds,” said Nisarg Trivedi, a Middle East director at Schroders Investment, adding that if you are saving for a particular event, be it buying a house or education, then you can afford to take a little bit more risk as your portfolio can ride through the cycles.
If you are young and can afford to take risk then you should focus your portfolio towards shares, but if you are a little bit older and want safer options your portfolio should be more skewed towards bonds.
Generally, a lower risk investment has a lower potential for profit, while a higher risk investment has a higher potential for profit but also a potential for a greater loss. Veteran investors voiced how market risks are important when it comes to investments, adding that this is why any wealth advisor would also sit you down with a risk profiler.
“They (advisors and risk profilers) need to know how much variations or ups and downs you can manage or digest within your portfolios,” Trivedi said.
Going long or short
Once an investor decides the purpose of the investment, depending on the duration, they can decide what investment products to look at.
If you need the money in the next few years, it is advised to take a more financially conservative approach to your investments and opt for a more secure type of investment.
Even if you are most interested in short-term investments, experts suggest you set aside a portion of your money for long-term investments. This will protect you if you were to lose some of your money because of a sudden market crash.
Not all eggs in one basket
Dividing your investments among different baskets is a key strategy to minimizing your risk and potentially increasing your gains. Broadly speaking, that means allocating your investments in a mix of stocks, bonds, and mutual funds.
Trivedi said the most important criteria for balancing a portfolio is how the investor divides and allocates between the different asset classes.
A balanced investment strategy is a way of combining investments in a portfolio that aims to balance risk and return. Typically, balanced portfolios, which would be used by investors with moderate risk tolerance, are divided equally between stocks and bonds.
What it means:
A long-term investment usually offers a higher probability of maximizing your return over a 10-year period, rather than bringing you a high return in just a few years. Examples of long-term investment vehicles include stocks and index funds.
A short-term investment is an investment you expect to hold for three years or less, then sell and/or convert to cash. Examples of short-term investments include money market funds, certificates of deposit, and short-term bonds. Examples of investment vehicles that lend themselves to a shorter investment period include stocks, mutual funds, and some bonds.
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a financial market index.
Stocks are an equity investment that represents part ownership in a corporation and entitles you to part of that corporation’s earnings and assets.
Bonds are a type of investment that result in an investor lending money to the bond issuer in exchange for interest payments.