Setting a regular sum of money aside every month is a great way to save for the future. It instils discipline and better still, protects you against stock market volatility.
In fact, you actually benefit when share prices fall as your monthly contribution gives you more shares for your money.
David Jenkins, 37, and his wife Siobhan Moncur, 31, who recently moved to Dubai, are setting aside money every month to fund their ambition of building a home in their native Scotland. “We dream of owning a home overlooking St Andrews Golf Club, with an amazing fireplace, big glass windows and terrific views of the rain and snow sweeping the golf course,” Mr Jenkins says.
The couple don’t expect to return to Scotland for at least 15 years, but want to raise the money to start building their property well before then. “That means we need to start saving as much as we can now,” adds Mr Jenkins, the general manager of the ICC Global Cricket Academy in Dubai.
He currently invests 15 per cent of his salary in a regular monthly investment plan recommended by Richard Taylor at Professional Investment Consultants in Dubai. “I plan to double my monthly payment to around 30 per cent of my salary after my wife starts working as well,” says Mr Jenkins.
The couple are investing both for the short term and the long term. “We’d like to buy the plot within a year or two, and have enough money to start building after that. We’ve got big plans. The more we save now, the easier it will be to live the life we want to lead.”
If you want a comfortable retirement, you have to save for it. If you want to slap down a decent deposit on a new apartment, again, you have to start tucking money away today. Investing your spare cash isn’t easy, but whether you’re investing US$50 or $5,000 a month, here’s how to do it:
$50 a month
Even if you haven’t got much money left over after rent and dining out, saving something is better than saving nothing. Over time, it can build up into a worthwhile amount, especially if you crank up your contributions when you have more money to spare.
The long-term benefits of starting to invest early cannot be overstated, says Mr Taylor, senior wealth manager with Professional Investment Consultants. “If you start in your 20s, that money has 30 or 40 years to grow before you hit retirement, which means it could grow into a sizeable sum. If it grows by 7 per cent a year, for example, your money will double in value every 10 years.”
Say you invest $50 a month from age 25 into an offshore pension plan. By age 65, your contributions will be worth around $98,482, assuming 6 per cent average annual growth after charges.
But if you don’t start until age 35, your $50 a month will turn into just $50,281. “Those early payments have so much longer to benefit from the magical power of compound interest [where you earn interest on your interest],” Mr Taylor says, adding that the problem with investing a small amount such as $50 a month is that few offshore investment plans accept such small sums, and any growth will be eaten up by the charges.
If you do not qualify for such a scheme, a local approach might be to invest in National Bonds. The National Bonds Corporation, a Sharia-compliant saving scheme, set up in 2006, is similar to the UK’s Premium Bonds scheme, except there is also an annual profit rate as well as daily and monthly prizes. Bond holders earn higher returns on the bonds they have held the longest. Plus those who set up a standing order from their bank qualify for more chances of winning prizes, including cash rewards from Dh50 to Dh1 million, gold and cars. While the 2012 profit rate on the Islamic scheme was only 1.5 per cent last year, it was as high as 7.07 per cent in 2008.
$500 a month
Once you start saving larger sums, offshore investment plans become more attractive options, says Rupert Connor, an independent financial adviser in Dubai. “This should give you the discipline to maintain your payments and will boost your chances of building a large capital lump sum.”
By making regular monthly payments, you benefit from something called “dollar cost averaging”. “Stock markets inevitably go up and down, but regularly drip-feeding money into your chosen investments will smooth volatility and reduces risk,” Mr Connor explains.
This means you actually benefit when markets fall, because your monthly payment buys more stock at the same price. “It also means you don’t have to worry about investing all your savings at the top of the market, which is a worry if you are investing a single lump sum,” Mr Connor adds.
If you’re investing for at least five years, you should think about committing to an offshore contractual investment plan, Mr Connor says. “You have to decide whether you want to invest over a five, 10 or 15-year term. Make sure you can commit to your chosen term, because there are penalties if you withdraw your money early.”
A good offshore investment account should help you build a balanced portfolio by investing in a spread of stocks and shares, mutual funds and bonds, again, helping reduce risk.
If taking advice, check the adviser’s credentials carefully, Mr Connor says. “Ask to see their qualifications, find out how long they have been operating within the offshore market, and make sure they have all the correct licences,” he adds.
$5,000 a month
Two things matter when investing money: your goal and your time horizon, says David Hughes, divisional manager at wealth advisers PIC (Middle East). “Buying a house is a goal, for example, but doing so within the next three years is a time horizon. Being financially independent at 60 is a goal, your time horizon will depend on how old you are.”
Mr Hughes says the goal is what motivates people to save, but the time horizon determines which investments you choose. “If you’re looking to build up a deposit to buy a property over the next two or three years, you should keep the money safely in the bank, to protect its value against stock market volatility.”
Rather than a current account, pick a savings account to store that deposit. UAE interest rates are still low, with the highest around 2.25 per cent, but earning some interest better than earning none.
But if you’re looking to save $5,000 a month as part of your long-term retirement plan, you need exposure to stock markets. “Stocks and shares are more volatile, but should produce markedly better returns over time.”
If you’re investing over the long term you don’t have to worry so much about short-term market setbacks, plus again, you benefit from dollar-cost averaging.
Mr Hughes says most people should invest in a spread of mutual funds, rather than taking the greater risk of buying individual company shares.
It makes sense to build a diverse spread of funds, covering major regions such as the US, UK, Europe and emerging markets.
When investing, you also have to address currency risk. As a rule, you should look for funds denominated in the currency of the region you plan to retire in.
If you work in the UAE and plan to retire in the US, currency risk is less of a concern. But if you plan to retire elsewhere, you must pay much closer attention, says Jahangir Aka, head of SEI Investments, Middle East. “What really matters is your home bias. If you expect to retire in Florida, you should be collecting dollars. If you are set for London, it will be sterling. If it’s Paris, you want euros.”
Although your home currency should be the priority, you should create a balanced mix of global investments with exposure to a range of countries and currencies to avoid overexposure to one currency.
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