How many times have you received a call here in the UAE from a real estate salesperson offering you a fantastic opportunity in Cyprus? Apparently, Cyprus is the place where everyone is buying right now, so I need to get involved myself. Or that's what they were saying six months ago. I am old enough to remember the last Cyprus real estate surge, and many people bought and sold within 5 years and made no real profit. I haven't received any of these calls for a while now, so does this mean the market is dead? I don't believe so, but buying anything based only on someone else's enthusiasm isn't a good decision.
The issue here is that it is easy to get caught up in the latest investment fad, and as humans we are more comfortable doing something when we know everyone else is doing it. We are very social creatures, and the "herd mentality" is surprisingly strong. It helps us legitimise our decisions by referring to others doing the same thing, and this is the reason that advertisers use statistics so readily when trying to convince us to buy their products.
Yet the legendary investor Warren Buffet advises us to "be wary when everyone else is greedy, and be greedy when everyone else is wary". As Mr. Buffet is now one of the world's wealthiest people, he should know. In my role as a financial adviser, I see how these fads manifest themselves in people's lives, and how they can lead to an enormous amount of stress and strain as people spend money they may not have to get into an investment "before it's too late".
How do you know it's too late? One of the basic methods I use to decide whether it's too late to get into an investment is by watching what the general public is saying about it. For example, if the local paper is full of real estate for sale and every other magazine article talks about getting into real estate to "become a millionaire", then surely that is the time not to buy. For this to become the generally accepted view, that market must have been growing steadily for years, and on a very rough scale you would probably be getting in too late.
Sticking to the real estate theme, the above has been very true of the UAE market over the last few years. Yet with prices falling, now must surely be an optimum to be buying property in the region, no? When asked about the market, Trudi Pearce, client manager for Parkvale Group in Dubai, said, "People are still buying property in the UAE, and the market has become more mature as the speculators have left the scene. There is still good demand for villas, at the right price, and we can see that both buyers and sellers have become more realistic in their expectations. What we are seeing here is sensible investors taking a far more methodical and careful perspective to ensure that their money works effectively for them". I always work on the fundamentals before anything else, and clients are sometimes surprised.
Perhaps because the expectation here in the region is that everybody is selling something? I would suggest that it is far more important for an individual to have a comfortable amount of cash in the bank, accessible and split between onshore and offshore accounts, before jumping into buying shares on the local markets, for example. In order to help you take care of the basics first, follow these four financial fundamentals, in order. They will strengthen your portfolio and ensure that you will be better off when you retire.
Ensure you have cash in your bank, instantly available, and enough to cover your expenses. A rule of thumb would be a sum equal to two or three months of your salary. Most expatriates should keep anything over and above this amount in an offshore bank, so that you can have instant access to cash even if your account here is frozen in the event of, say, redundancy. Work out a plan for any debt reduction with your adviser. Until you arrange these things, do not proceed to the next stage.
Work with your adviser on protecting yourself, your family and your assets through different forms of insurance, including policies for your health and your home. Protection is far more important than most people realise, especially for individuals with children. Also consider cash deposits that provide you with greater amounts of interest.
Examine your medium- to long-term requirements, anything more than five years from now or beyond. Consider investing to meet these requirements, either through regular (or monthly) savings or lump-sum investments. There are plenty of options, so if you suspect unscrupulous advice or "product pushing" get a second opinion from someone qualified to give it. Stages 2 and 3 can be managed at the same time.
Only after all other stages have been planned and executed should you look at this stage, which is where you can take any spare cash and buy into speculative investments. This would include such assets as company shares on the stock markets or purchasing additional properties for investment. The common mistake is to jump from Stage 1 (or lower!) straight to Stage 4, because someone convinced you to join them in a financial fad, rather than focusing on the fundamentals. Taking the more fundamentals-based approach highlighted above can help you avoid the boom and bust cycles that fads magnify. Not only will you be able to sleep better at night, you'll be wealthier too. Stuart Birch is a financial consultant with Acuma Wealth Management in Dubai. He can be reached at firstname.lastname@example.org