Everyone wants to build financial peace of mind. Many people dream of being able to live off their savings, without having to work.
Yet, very few actually follow the strategy that gives them the best odds of reaching such a goal — investing regularly for the long term in diversified portfolios.
Too much of the region’s wealth sits in cash
In the Middle East and North Africa region, about 73 per cent of wealth is unmanaged, compared with 52 per cent in the US — suggesting that the majority of wealth isn’t invested and is likely to be sitting in cash.
This could be a problem because the average return on cash is less than today’s inflation rate. For example:
- The UAE Central Bank projected inflation at 5.6 per cent in 2022.
- Savings accounts typically only yield between 0.5 per cent and 1.5 per cent per annum.
- Banks currently offer a return of 3 per cent to 4 per cent per annum on 12-month fixed deposits (as of November 2022).
So, money parked in savings accounts or fixed deposits is effectively losing more than 3 per cent of its value per annum.
While it’s important to have enough cash for monthly expenses and emergencies, over-investing in cash can put your goal of achieving financial peace of mind at risk.
Be careful of over-investing in property
Many built wealth in the UAE by investing in real estate, especially after the Covid-19 pandemic.
As the economy grew substantially, housing prices followed suit. Average home prices have grown more than 15 per cent in 2022.
It might seem that this growth will continue as demand for property continues to be high: new projects are being built and incentive schemes such as the UAE Golden Visa encourages investors to purchase properties worth more than Dh2 million.
Moreover, the country’s zero per cent income tax makes it an attractive place for new residents.
Zooming out, you’ll see that the real estate market tends to be cyclical. It reached highs in 2008 and 2015, but lows in 2010 and 2020.
So, nothing can guarantee an everlasting upwards trend.
Don’t put all your money in a few individual stocks
Apart from putting too much money in cash or property, there’s one more pitfall we should avoid: investing exclusively in a few shares we know or like.
In 2021, many people fell into this trap and are now suffering significant losses as share prices in the technology sector have plummeted.
Asset allocation drives 94 per cent of portfolio performance, while stock selection drives just 4 per cent and market timing accounts for the remaining 2 per cent, according to research by the CFA Institute.
It’s prudent to assess what percentage of your portfolio should go towards stocks, bonds or real estate than choose between individual stocks such as Google or Microsoft.
How should you maximise chances of building wealth?
One easy way is to make sure your portfolio has broad market exposure.
Despite significant volatility — including financial crises — the MSCI All Country World Index has returned 7 per cent per annum since 1990.
Three techniques to stay invested amid market volatility
1. Diversify, diversify, diversify: investors should diversify equity investments globally, across geographies and sectors. Maintaining broad market exposure reduces concentration risk in a portfolio and smoothens volatility of its returns over time.
2. Balance portfolios with protective asset classes: including fixed income and commodities into an investment portfolio allows investors to take advantage of asset classes’ low correlations to equities.
In other words, the prices of stocks, bonds and commodities don’t tend to rise and fall together over the long run.
As a result, investing in a portfolio with a mix of risky and protective assets lowers volatility and smooths out returns over time.
3. Invest consistently into the markets: invest consistently over time — ideally with each pay cheque. This strategy is also known as dollar-cost averaging.
DCA averages out the times you buy a security across market shifts, so you ultimately accumulate securities at close to their fair value.
More importantly, DCA removes the stress of having to time the market.
Other methods of building financial peace include having enough cash for emergencies and investing the rest.
Own your primary residence, but don’t invest exclusively in property.
Invest regularly and over the long term, so you can weather the market’s ups and downs.
Joseph El Am is the general manager at StashAway Mena