A successful investment portfolio takes a personal touch
For first-time investors, choosing an investment can be complicated. Friends Provident International (FPI), a provider of unit-linked savings and life insurance products, recently released the seventh edition of its Investor Attitudes Report, which looks at the decision-making patterns of investors. So, to help you to make more informed decisions, Ian Bentley, the Middle East and Africa sales director at FPI, says there are key issues a potential investor should consider before parting with their hard-earned cash.
1. The value of financial advice
I cannot stress enough the importance of seeking appropriate financial advice before putting your money to work. When you invest, you want to be confident that the likely levels of investment return will meet your needs. Our report shows that the increasing negative sentiment towards shares and equities is in line with a significant decrease in the number of investors turning to stockbrokers for financial advice. In fact, very often people turn to friends or family for strategic financial advice. However, without professional advice you may be taking unnecessary and often misunderstood risks.
Diversification allows you to spread the risk associated with investment across different asset categories and geographical regions. You should consider investing a percentage of your portfolio in lower-risk assets to avoid the dangers of having your whole investment in medium- or high-risk categories and spread your investments across different regions. It is also important to look at how asset classes may be correlated - or connected - because this can impact the investment performance of a portfolio. Any balanced portfolio should include cash, an investment in equities, fixed-income bonds and property.
Put simply, an investment with high volatility has more risk associated with it. It is important to understand the relationship between volatility and risk. If you are willing to risk an investment in a volatile asset class, you may achieve high returns, but you must also accept that you could lose some - or in extreme cases - all of your investment.
4. Appetite for risk
Investors should choose assets that closely match their appetite for risk. We have seen UAE investors' appetite for risk reduce - no doubt due to the current investment climate - with more of them considering risk-averse strategies such as saving in cash. An investment that gives a high return, but carries a high tendency to fluctuate in value may only be suitable for those who can afford to lose some of their money or can accept a high degree of price volatility.
5. The dangers of inflation
Always consider the impact of inflation on any asset class. It may not have a drastic effect on stocks, but inflation plays a huge role in fixed-income investments. When you receive your investment return, you may find the value of your initial capital has been eroded due to inflation eating into the profits.
6. Reasons for investing
Think about why you are investing. Is it for your retirement, to buy a house, to pay for your children's education or maybe to secure financial independence? Thinking about what you want to achieve will help you to decide how much risk you are ready to take and how much you are willing to invest.
7. Time horizon
Our report shows that an increasing number of UAE investors are pursuing long-term investment strategies, with a time horizon of more than five years. Generally, medium- to long-term investments allow for a more aggressive investment approach because the volatility of returns is often evened out over time. If you invest to pay for your children's university fees, for example, you have an investment time horizon of 18 years from the time they are born.
8. Past performance
The research conducted for our report shows that the most frequent consideration for UAE investors when selecting investment funds is past performance. This should never be viewed as a reliable indicator of future performance. Even if you have monitored a stock's movements for years, future market changes are not predictable.
People often make the mistake of confusing the familiar with the safe. By this, I mean they do not always look beyond their home country when choosing where to invest. However, if you choose to invest in a single country equity and a regional shock occurs, such as the tsunami in Japan, there may be a slump that could negatively impact the investment performance of your portfolio - simply because you chose to invest disproportionately in that one country. There is, of course, correlation between the world's investment markets, but this can be mitigated to some extent by investing with a more global outlook.
10. The cost
Consider the costs associated with any investment. Advice from professionals may be paid for directly by you on a fee basis. Alternatively, the adviser may be remunerated by the provider of the investment in question. If you are investing in mutual funds, there are costs involved with buying and selling the assets in which the fund invests, charges associated with the valuation of the funds and charges associated with the product to which the funds are linked.
Updated: April 21, 2012 04:00 AM