Dubai: Not long ago, people had jobs-for-life, investing in brick and mortar was a sure way to building wealth, some government pensions were more generous than today and family structures allowed enough support for survival as several generations lived under the same roof. Investing in financial markets was of interest to a select few people.
However, times have changed. Today, financial markets are an integral part of all economies and most products can be commoditised and traded on exchanges. Investing in financial markets is no longer optional if one desires a comfortable retirement. But, how does one start?
Bargain hunters quite often make rapid investment decisions without considering their long-term goals or their risk appetite and therefore instead of saving for the future, they could easily end up losing their money. Here we highlight a few lessons that investors should consider before they start thinking about investing.
Lesson #1 - Set a financial goal: The first step to successful investing is figuring out your goals and risk tolerance – either on your own or with the help of a financial professional. There is no guarantee that you’ll reach your goal but a well thought out financial plan will keep you focused.
Lesson #2 - Evaluate your risk appetite: All investments involve some degree of risk. It's important that you understand before you invest that you could lose some or all of your money. Unlike bank deposits (to some extent), investing in financial markets is typically not government insured. You could lose your principal, and that’s true even if you purchase your investments through a bank.
The reward for taking on risk is the potential for a greater investment return. The longer term your goal is, the more risk you can take such as investing in shares or bonds. Alternatively investing in cash deposits may be appropriate for short-term financial goals.
Lesson #3 - Consider diversification of investments: Historically, the returns of the three major asset categories – stocks, bonds, and cash – have not moved up and down at the same time. Market conditions that cause one asset category to do well often cause another asset category to have average or poor returns. By investing in more than one asset category, you'll reduce the risk that you'll lose money and your portfolio's overall investment returns will have a smoother ride.
Lesson #4 - Create and maintain an emergency fund: It’s smart to put enough money aside to cover an emergency, like sudden unemployment so that you are not forced to sell your investment at a week point in cycle. Keeping up to six months of expenses in an emergency fund is generally savvy.
Lesson #5 - Pay off high interest debt: There is no investment strategy anywhere that pays off as well as, or with less risk than, merely paying off all high interest debt you may have. If you owe money on high interest credit cards, the wisest thing you can do under any market conditions is to pay off the balance in full as quickly as possible.
Lesson #6 - Be alert to fraudsters: In today’s world of hyper digitisation, be aware of cybercrimes. Also be aware of fraudsters. Scam artists read the headlines, too. Often, they’ll use a highly publicised news item to lure potential investors and make their ‘opportunity’ sound more legitimate. If you do not have a financial planner, it is advisable to always take your time and talk to trusted friends and family members before investing.
Lesson #7 - Take advantage of employer’s contribution: In many employer-sponsored retirement plans, the employer will match some or all of your contributions. If your employer offers a retirement plan and you do not contribute enough to get your employer’s maximum match, you are passing up free money. This discipline of contributing to your retirement fund should start as early in your career as possible as time is of essence in multiplying your savings.
Lesson #8 - Rebalancing the portfolio at least annually if not six months: Shifting money away from an asset category when it is doing well in favour of an asset category that is doing poorly may not be easy, but it can be a wise move. By cutting back on the current ‘winners’ and adding more of the current so-called ‘losers’, rebalancing forces you to buy low and sell high.
Lesson #9 - Consider dollar cost averaging: To protect yourself from the risk of investing all of your money at the wrong time, it’s advisable to follow a consistent pattern of adding new money, regularly and in small instalments, to your investment over a long period of time. By making regular investments, you will buy more of an investment when its price is low and less of the investment when its price is high and this in the long term will give better returns than chunky one off or yearly investments.
Anita Yadav, CEO of Global Credit Advisory Ltd, is a seasoned investment and stock markets expert with experience of two-plus decades. She is currently a strategy advisor to several government and large private institutions in the Middle east.