Building your first investment portfolio can be a daunting task for many DIY investors, but it is diversity that will give you the edge.
Starting out from scratch
It's not often in life you get to start with a clean slate. Few investors get the opportunity. Most have assembled a hodgepodge of investments and pensions before they even think of building a balanced portfolio.
But let's say you are starting from scratch. A fresh start, with the chance to give structure and sense to your investments. What should you do? And how can you apply that to your existing mish-mash of savings plans?
There is one piece of advice that applies to almost everybody. Every investor should have a pot of rainy-day money to see them through any financial emergency, such as falling ill or losing your job. This should be worth up to six months of your salary and kept on instant access, so you can get your hands on it in a hurry.
After that, it gets personal and knowing where to start is a daunting task, says James Bateman, the head of manager selection at Fidelity Worldwide Investment.
"The very first question to ask yourself is how much risk you are willing to take. To what extent can you tolerate the inevitable ups and downs of the stock market?"
The longer your investment, the more risks you can take because you have time to claw back any early losses. If you are saving for, say, retirement in 20 or 30 years, you can and should take more risks than somebody who is saving for a specific short-term target, such as a child's education or a deposit on a house, Mr Bateman says.
Younger investors should have greater exposure to stocks and shares, which are riskier but potentially more rewarding, while older people should shift their money into lower-risk cash and bonds as they approach retirement.
Once you have established your attitude to risk and an investment time frame, you can start building your portfolio, says James Thomas, the regional director of Acuma Financial Management in Dubai. "In an ideal world, every investor would start with a blank piece of paper," he says. "In practice, this can't always be done. So you need to examine your existing investments to see whether they match your personal needs."
If they don't, you will need to re-balance your portfolio. You don't necessarily have to sell what you have too much of; you could balance it by investing in more of what you need.
There is no right or wrong way to invest. "If you are taking financial advice, you need to make sure your manager constructs a portfolio to meet your personal needs and reviews them regularly because they will change," Mr Thomas says.
Paying an investment adviser isn't compulsory and assembling your own portfolio may be easier than you think, says David Kuo from Motley Fool, the stocks and shares website.
"You could start with a low-cost index tracking fund that follows major global indices, such as the S&P 500 in the US or FTSE 100, a UK index with a global reach."
You could then add a sprinkling of individual stocks. "Start with big global businesses paying healthy dividends, for example Coca-Cola, Unilever in the UK, Nestlé in Switzerland and Jardine Strategic Holdings, one of Asia's largest and most successful conglomerates," Mr Kuo says.
But running your own portfolio may be a step too far for many expats, especially those with complex tax and financial planning needs. Investing is an increasingly complex discipline, says Steve Gregory, the managing partner at Holborn Assets, a financial services company in Dubai. "As the balance of economic power tips from West to East, investors have to look beyond the US, Europe and Japan, into emerging markets such as Brazil, Russia, India, China and South Africa, and frontier markets like Vietnam, Turkey, Egypt and Chile."
A good adviser can alert you to hidden investment dangers, he says. "Property is particularly risky because most people borrow money to invest - and that is the single riskiest thing you can do. If prices fall, you could lose your deposit and still owe the bank more than the property is worth."
Currency movements are another menace, especially for the internationally mobile, Mr Gregory says. "If you buy a property in, say, Thailand, you are exposed to the Thai baht. If you buy Japanese stocks or funds, you are exposed to the yen and any cash held in Singapore is exposed to the Singapore dollar."
Because the dirham is pegged to the US dollar, many UAE residents believe that holding cash locally, investing in US funds and owning a property in, say, Florida, protects them from currency risk. "They're wrong, because you are 100 per cent exposed to the US dollar and it is never wise to be exposed to a single currency or asset class," Mr Gregory says.
Diversification is vital in any portfolio, says David Hughes, a senior area manager at PIC (Middle East). "Different investments perform well at different times, which means you need to spread the money between shares, cash, property and other assets, and different parts of the world to reduce risk and volatility.
Drip-feeding your money into the market can also reduce risk by protecting you from a sudden market crash the day after you pay in a lump sum. "This is much safer than trying to time the markets, which is impossible to do accurately on a regular basis," he says.
But you have to accept you can't eliminate risk altogether. "You have to be willing to risk some of your capital for the potential of better returns. Just make sure you understand and accept any risks you are taking," Mr Hughes says.
Having children, getting married, finding (or losing) a job, buying a house, moving country and many other life-changing events could radically change what you need from your investments.
Picking up that blank sheet of paper is the easiest part.
As your portfolio grows and your life changes, it all gets a little more complicated. The key is to make sure you are still addressing that very first question: how much risk can you stand?