About 68 percent of residents in the UAE consider saving money as the top priority in 2021, according to a survey by Bayt.com and YouGov. If you plan to build your earnings, choosing the right financial product can help you grow your money over time.
The key is to not put your savings in a jar or zero-interest bank account. You need to invest your money regardless of how small you save each month.
While mastering the nuances can take years, it doesn’t take long to understand the basics of how to choose the right financial product. This guide will help you pick your investments wisely.
- Know the Timeline You Need to Commit to
Your timeline is the period in which you will leave your investments untouched. You can expect a reasonable rate of return with a long-term timeline. That is why experts recommend people start investing earlier in life. To build significant wealth, you must take advantage of the power of compounding.
- Craft the Right Asset Allocation Strategy
For investors, hoarding cash is not the ideal choice because inflation decreases the actual value of money over time. If we assume the inflation occurs at a rate of 3 percent per year, then AED 100,000 will be worth just about AED 40,000 in 30 years.
A diversified portfolio helps manage risk and earn more. Understanding one’s risk tolerance and managing that risk tolerance with expected returns is essential. Even the most cautious investor should mix in a few stocks or stock index funds, knowing that their investment in bonds will offset any losses. Similarly, even the most fearless investor should invest in bonds to cushion a dramatic drop in stock investments.
Your age plays a vital role in how much risk you can tolerate. As you reach your retirement age, you should take fewer risks to jeopardize your account balance.
When balancing stocks and bonds, you can follow the 120 rule. The rule is simple: Subtract your current age from 120. The resulting figure is the portion you should place in stocks and the remaining in bonds.
Suppose you are currently 40 years old. You should put 80 percent in stocks and 20 percent in bonds, according to the rule. Once you become 50 years old, you should invest 70 percent in stocks and 30 percent in bonds.
However, one should not be limited to stocks and bonds alone. One should think beyond stocks and bonds as well. You can diversify your portfolio by expanding your investments in other asset classes, such as real estate investment trusts (REITs), commodities, and hedge funds. Why?
Choosing to invest in various asset classes does more than manage risks. You also earn more when you diversify your portfolio. Thus, instead of focusing on the risk of each asset, you should create a diversified portfolio because it is less volatile than the individual asset classes.
When you plan to do this, seeking the guidance of financial advisors is highly recommended to understand the nuances of each alternative investment option.
- Conduct Technical and Fundamental Analysis
Technical analysis refers to going through enormous volumes of data to forecast the direction of various asset prices. Technical analysts believe that asset prices follow a pattern, meaning if one can decipher the way, one can make better decisions.
On the other hand, fundamental analysis is carried out based on the intrinsic value of an asset. For that, investors can look at the industry’s prospects, quality of company management, revenues of a company, and its profit margin over time.
Note that there is no such thing as the perfect investment. Only crafting an intelligent investment strategy can help you create a portfolio that offers high returns and relatively low risks.