DUBAI 14 February 2021: Navigating and understanding how you invest money can seem like a daunting topic; however, once broken down, it is much simpler than you realise.
Around 45% of the Mena region’s wealth is cash deposits in banks, meaning there is so much opportunity for cash growth with the right tools and knowledge.
StashAway, a digital wealth management platform shares its top five tips for getting your 2021 financial planning right so you can start fulfilling your financial goals.
1. Identify your goals
Most people feel lost when it comes to financial planning because they usually don’t know where to start. The first step is to identify your goals and what it is that you want to achieve in life, once that has been done the planning can progress.
Whether you want to buy a house in five years, put your children through higher education or relocate to a different country, you need to know how much money you will need for each of these goals and what you need to do in order to fulfil them.
Financial planning requires creating a timeline for each goal, and you need to ascertain how much money you will need and when you will need the money by; from there you will be able to determine how much you should be saving each month to reach that goal in the required timeframe.
2. Map out your timeline and start investing early
Once you have identified your goals and started moving forwards, you should consider investing your money to make it work harder for you. Saving is great, however money that sits stagnant in a savings account is ultimately causing you to lose out on money, by not giving those savings a chance to grow.
Investing is a way to allow your money to flourish, and ‘compound interest’, refers to the ‘snowball effect’. Compound interest is the effect of earning interest not only on the money you save (the principle) but also on the accumulated returns you receive every year.
Because of this effect, it’s very important to start investing early. For example, if you want to save $1,000,000 by the time you retire at 65, assuming you started a monthly investment plan that gives you a net return of 6% p.a., you will need to start at age 25 with a commitment of $450 monthly. If you wait 10 years and only start at age 35, that amount more than doubles to $952 monthly, that further increases to $2,023 monthly at age 45 and $5,404 monthly at age 55.
3. Diversify your portfolio
It is very important to diversify your investment portfolio in order to manage risk and reduce the volatility of assets. Your investment portfolio should include various asset classes, and within those asset classes, it should include exposure to different factors including geographies, sectors, maturity dates and structures. The reason being, if any particular sector was to do badly in any given year, you are protected in other sectors and it will not affect your entire portfolio. Other asset classes that may have done better that year, could help balance out or minimise the losses in your portfolio.
Portfolios can be optimised through “asset allocation” – asset classes may include equities (i.e., shares in private companies) around the world, with exposure to a variety of sectors such as technology and consumer staples. It may also include different types of bonds with varying maturities, like short-term and long-term government bonds or investment-grade corporate bonds.
4. Evaluate the risks and how much you can sustain
There will always be an element of risk when it comes to investing, usually the bigger the risk, the bigger the potential return, however this is not always the case if you are factoring in the volatility of an investment. Risk is often measured by its volatility, which can be observed by the daily or weekly changes in the price of an asset; the larger the swings in price, the greater the volatility.
For short-term financial goals such as buying a car in three years or buying a house in five, choosing a higher-risk investment product will mean that you will see larger volatility and potentially get lower or even negative returns.
With a short-term investment horizon, you do not have enough time to ride out the inevitable corrections and recessions in the market. In such cases, you should stay conservative in your investments. For long-term financial goals, such as a retirement fund that will allow for 10-30 years, you can afford to take more risk, as you will not need that money for the short term you can afford to wait out any market issues.
It is also important to build an investment portfolio with a level of risk that you are personally comfortable with. If your portfolio has a risk level that keeps you awake at night, it is probably not right for you.
5. Monitor your spending
Whether you are looking at your personal spending or the costs of investing, it is important to be mindful of the amount of money you have going out, as much as the figures you are seeing coming in – if you aren’t bringing in more money than you are spending, you will need to reassess your personal finances before investing. Fees connected to your investment portfolio will also have a huge impact on the returns you receive from your investments, i.e., 1% more fees means 1% less in returns for you, so when evaluating your investment options, you need to look for fees that are right for you.
Over the last few years, technology has enabled digital wealth managers to disrupt both the wealth management industry and the traditional fee structure that has come to define it. The technology-driven automated processes used by digital managers create efficiencies that can be passed on to the investor in the form of lower fees. Typical digital wealth managers charge 1% or less per annum, and often do not have other fees.