Many new investors in Dubai, Abu Dhabi, or other emirates find it challenging to choose between the best investments in the UAE that are available to them.
However, knowing where to invest is a step below getting your finances in order, so you can earn money to invest, and understanding the timeless principles important for investment success.
It is to those two preparatory topics that we turn in this article.
Putting your finances in order
Have a budget
The surest way to wealth is to invest consistently, and budgeting is the only path towards consistent investing. This is the path that those who have built wealth in the UAE have followed, as many studies have shown.
It’s been said that a budget tells your money where it should go instead of you worrying where it has gone.
The 50/30/20 rule is an example of a budgeting system that many have found useful. With this system, 50% of your income is for your wants, 30% for your needs, and the remaining 20% for saving/investing.
By consistently investing 20% of your monthly income in the financial markets, you can enjoy the benefits of compounding and build wealth for the future. This is better than a haphazard system where you are investing this month and not investing again for the next five months or so.
Stick to the budget
Writing out a budget on paper or software on your phone is not enough. You need to discipline yourself to stick to the budget, as there will always be temptation to overspend, especially in a place like the UAE where there will always be a new thing that will tickle your fancy.
One thing that can help is to automate your saving/investing. That is, you can instruct your savings/investment platform to automatically deduct a certain amount from your account on a given day (usually the salary day).
With this, the risk of overspending reduces.
Have an emergency fund
An emergency fund is a stash of money you keep away to deal with unexpected expenses (car breakdown, unplanned travel, etc.).
It is advisable that building an emergency fund should be the first task for the 20% of your income that you save. Financial advisors in the UAE suggest that this fund should have up to six months’ worth of your living expenses (needs plus wants).
Investing before you have built an emergency fund (whether partially or fully) is dangerous. If an emergency arises, you may have to sell your investments at a capital loss (lower price than you bought them), which means you are losing money.
Timeless investing principles that will help you build wealth
After building an emergency fund, you are ready to start investing in the stock market. But before you do so, consider these three key investing principles:
Invest for the long term
Stock markets rise and fall in the short term, but they tend to rise more than they fall in the long term. The longer you stay in the market, the higher the probability of making money and the lower the probability of losing it.
In other words, the stock market is not a get-rich-quick scheme but a wealth machine for people who can stay in it for the long term.
Diversify your portfolio
One way to reduce the risk of investing in the stock market is to diversify your holdings.
If you invest in the stocks of two companies and one of them experiences a trouble that causes it to lose 50% of its value, your entire portfolio will be in big trouble. Suppose the other company is in the same industry as the first and also loses 30% of its value. You will be down badly.
Also, while the S&P 500 has fallen by 3.49% so far this year (at the time of writing), gold has risen by 26.40%. An investor who invested only in the S&P 500 will have lost money, but the one who has learnt how to invest in gold ETFs in addition to the S&P 500 will have made money.
Given these two scenarios (and others like them), you need to diversify your portfolio across various industries (finance, technology, consumer cyclical, healthcare, etc.), market caps (large cap, mid cap, and small cap), asset classes (stocks, bonds, gold, REITs, etc), and regions (US, emerging markets, developed markets ex-US).
Choose an investment strategy that matches your skills and availability
Retail investors who don’t have the time or expertise to research various assets are better off embracing passive investment. This often involves investing in a portfolio of passively managed exchange-traded funds either directly or through a robo-advisor.
Those who have the time and expertise can pursue an active strategy – purchasing individual stocks and building an investment portfolio themselves.
With a platform like Dubai-based Sarwa, you can pursue any of these strategies. You can go the full passive route by investing in a portfolio of ETFs created for you by Sarwa based on your investment goals, risk tolerance, and time horizon. Alternatively, you can go the active route by purchasing individual stocks. Also, as a middle path between the two, you can create your portfolio of ETFs.
You can start using Sarwa with as little as $1 and enjoy low commission/fees. The platform is protected with 256-bit encryption, and transfers from your local bank account to Sarwa are free.
Once you have put your finances in order and have understood the principles of successful investing, you can start building wealth through Sarwa.
