Investments should not strain finances

Question: I am looking at options to increase my savings and make more money in the long term, but I not so clued-in on investments. How do I go about organising my finances?

Answer: What is investing? In simple terms, it is putting your money to work for you. You put in time at work and receive money in return. However, you can only put in so many hours and get paid for it. The money you invest, whether in bonds, hedge funds, stock or other investment schemes is like an extension of yourself that is working and over a period of time provides you with returns.

For many people, the idea of investing seems scary. There are several reasons for this - lack of knowledge and preconceived myths about investing.

Let's start by clarifying something - investing isn't reserved for the rich or only the skilled. With proper guidance and vision, anyone can invest. People invest not just to get rich and increase their savings, but also to enhance their current standard of living. With rising inflation costs, many people are finding they have less "loose change" in their pockets.

So what's keeping people away from investing? If you feel you don't know the terminology or mechanisms involved, you just need to remember everyone has gone through the learning curve and there are financial experts who can assist you.

Your first step is to sit with an independent financial adviser who will help you calculate how much you can invest based on your current financial situation. They will also help you assess your risk ability and manage your expectations.

Fallback capital

Investments can be tricky and it is important to always have fallback capital if your investment doesn't give you your anticipated returns. If you have properly planned your budget with an expert, your investments will only be an added source of income and not directly affect your daily financial spending.

You can start by investing small amounts which involve low risks until you feel more confident about investing lump sums. Many financial advisers will suggest investing in a bond where you have the option of low risk investments - the risk you take is up to you and only you.

A "bond" can be simply defined as an "IOU" where you, the investor, agree to loan money to a company in exchange for a prearranged interest rate on the return of the loan amount. Many businesses borrow money from independent investors through bonds. Investors "purchase" bonds based on the understanding that the company will return the borrowed amount over a fixed period of time including the interest. When the borrowed amount is paid off, it is called the "maturity" of a bond.

Other investment options include hedge funds and mutual funds. Hedge funds are essentially private investment funds that charge a performance fee, typically a percentage of the fund's profits, for the services of the fund manager. The idea of a hedge fund is that it looks to offset potential losses by hedging - protecting the sum of its original investment via a number of methods. The traditional role of hedge funds has changed in recent years and many now have a high risk profile that really only suits professional investors with a clear understanding of, and appetite for, risk.

Mutual funds are an increasingly popular investment vehicle - mutual funds pool money from a number of financiers in a collective investment, which are then managed by professionals and invested across a range of stocks.

People feel comfortable about investment in mutual funds because they diversify in order to reduce risk: mutual funds' investments typically include a basket of different stocks or sectors, so that poor performance in one area doesn't impact the investor too heavily.

Dollar cost averaging

The current volatility in the equity markets should not detract investors. A simple but effective method of investing in turbulent times is known as "dollar cost averaging". This is essentially a regular investment into the stock market rather than a lump sum investment. A financial adviser is well-placed to model these strategies.

- The writer is director of General Insurance at Nexus, one of the the region's leading financial advisors.

The views expressed are the author's and do not necessarily reflect the views of Gulf News. If you have any questions, please email at: advice@gulfnews.com