Developing a tailored personal financial plan - and sticking to it - is vital for your personal and family financial well-being. The amount of money you put aside for your future has a direct link to the amount of money you will have to spend in the later stages of your life.
Regular saving and investing is one of the best strategies for long term investments - it encourages discipline, it ensures you have built a nest egg for your personal goals be it your children's education, unforeseen health related events or retirement, mitigates the risks of market timing and is an effective way to make your money grow faster by investing it.
Unfortunately, many people start thinking of savings at a much later stage of their career and life, when in fact the best time to start saving is in the early to mid-cycle of one's lifetime.
For instance, someone who starts investing with a modest sum of Dh10,000 per year (Dh1,000 per month or Dh30 per day) at age 26; assuming an average growth of nine per cent per annum his wealth could grow close to Dh3 million by the time he/she is 65.
However, if the same individual starts investing at age 35, assuming the same growth rate; his/her wealth would grow to Dh1.3 million - that is a substantial difference. Therefore, the theory "earlier, the better" holds true when it comes to savings.
By saving a monthly amount into an investment portfolio, you can whether out the highs and lows in asset prices, a concept known as dollar cost averaging. Dollar cost averaging is an effective tool to invest over long periods of time and take advantage of volatile markets. This, added with the compounding factor, ensures regular savings are a very effective form of investing - turning your surplus income into real wealth.
No two people have the exact same goals. That's why it takes an individually tailored financial strategy to make your goals a reality. Standard Chartered's recent emerging affluent study shows that 52 per cent of the emerging affluent population feel that using financial products is how they will meet their goals/increase their wealth.
The place to start with is to have a budget. Build into the budget your lifestyle choices. Once you're happy with your chosen lifestyle and can afford it, then saving a certain portion of the income becomes possible and sustainable.
Asset allocation is the process of deciding how to divide your investment dollars across several asset categories. Stocks, bonds, and cash or cash alternatives are the most common components of an asset allocation strategy.
Choosing the appropriate asset classes in your investment portfolio is a function of how much time you have to achieve your investment goals and one needs to understand their goals and objectives to ensure short-, medium- and long-term planning.
Once this is set in place, asset allocation becomes easier. Another important point to consider when designing an investment portfolio is to have an allocation to alternative strategies. One of the main advantages of alternative strategies is its low correlation to conventional asset classes such as equities and fixed income.
As stated earlier, the greater the time horizon, the more risk you can afford to take.
The old rule of thumb used to be that you should subtract your age from 100 - and that's the percentage of your portfolio that you should keep in stocks. For example, if you're 30, you should keep 70 per cent of your portfolio in stocks.
For a growth-oriented portfolio, the investments tend to tilt towards global equities. One can invest in high yield fixed income securities such as high yield bonds which offer a higher yield to investors.
However, one should not forget the benefits of diversification. Equity and high yield bond allocations come with greater market volatility and risks. Therefore, one should always keep a certain portion in high quality fixed income funds for portfolio stability, a portion in alternative strategies to reduce portfolio volatility and sensitivity to conventional markets.
Regular savings plans allow clients to take advantage of a well-constructed, disciplined long-term investment programme to be in the best position to achieve their goals. Growth products typically carry high volatility and risks but also enable one to earn higher return than average over the long term. Some of the top growth products may include direct equities, equity based mutual funds and high yield bonds.
Insurance plans are another product that can be included if you have long term needs and are fairly similar to regular savings plans.
The most important channel is "in-person interaction" complemented by multi-channel approach to relationship manager via mobile, online and telephone "anytime, anywhere".
As wealth managers and private banks ramp up their digitisation strategies, many new models for the advisory businesses are emerging.. The challenge lies in the ability to build such capabilities in a way that still enables agility in delivering client value, while delivering cost efficiencies at the same time.
The arrival of automated advice, and the development of digital offerings across asset and wealth managers, ensures easier execution for clients to bypass their advisors in implementing investments and to avoid general interaction with them. Recent times have seen clients going directly to the companies that are providing the services and products that they need, without an intermediary.
However, the traditional personal advisor route is still the most preferred channel in the Middle East. The other important point to note is that most of the people in the Middle East typically choose to invest in real estate and/or in bank fixed deposits; both areas where the personal advisor is the most relevant channel.
Reinvesting savings income in the Middle East
Foreigners living in the UAE remitted Dh43.5 billion in the first three months of 2018 compared with Dh37.1bn in the previous year, according to state-run UAE news agency WAM.
In 2018, UAE issued landmark changes to its laws, these were a departure from a model in which foreign investors had to seek local partners to set up businesses outside free zones. Non-citizen workers are expected to leave once their employment ends and many send their earnings to their home countries. The announcement is expected to bolster economic growth and offer a more attractive environment to foreign investors and skilled workers as the UAE continues to find sources of revenue beyond oil.
The new ownership rules are expected to encourage expatriates to keep more of their earnings in the country. This is a major development and could lead to changes in attitude over the coming years and help reduce remittances and increase investments within the Middle East.
The potential for personal wealth growth in the UAE
According to a recent article published in Khaleej times on October 3, 2018; UAE wealth is set to grow 51 per cent to Dh5.14 trillion by 2026 and this growth is expected to come from local financial services and professional services (apart from strong HNW migration). Out of $925 billion wealth held by UAE residents, 51 per cent of this wealth comes from HNW with wealth of $1 million and more.
This creates a massive opportunity for financial institutions to generate awareness about savings amongst the residents so that a hefty spending culture can be limited at the expense of saving more for our future financial needs.
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By Gautam Duggal
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