New to investing? Find a style that works for you
If you’re a new investor, the world of investing can definitely be a bit intimidating. You probably don’t know where to start, and the endless investment advice available online can easily overwhelm anyone.
But before you sign up for that 20-year investment plan or start tracking the stock market, the Souqalmal.com team helps you figure out what type of investor you are, and what should be your ideal investment portfolio. How much risk can you afford to take? Every investor wants to make money, but not everyone wants to take on the same level of risk. Based on the risk/return trade off, a high level of uncertainty is associated with higher potential returns, and vice versa. But of course, there are no guarantees.
Higher risk could also translate into a higher possibility of losing your money.
Now the question is, how much risk can you handle?
Risk tolerance varies from person to person, and also depends on factors like your age, income stability, financial goals, present financial status and such. Ask yourself — How much can I afford to lose? Do I have other savings to fall back on? Emotions too can play a big role in determining your risk appetite. So, if you get stressed out easily, or lose your sleep over the thought of facing losses, then you may be naturally risk-averse. It is important to evaluate both, your financial risk tolerance and emotional risk tolerance. What is your investment objective? Before you decide where to put in your money, keep in mind what you’re trying to achieve.
Your investment objective could be saving up for your kids’ college education, building a retirement nest egg, buying a house and so on... Figure out how much you need from your investments to accomplish your goals, and what your investment time horizon is. This will give you a clearer idea of how to create your investment plan. Create your investment strategy Now coming to the big question — How do I decide where to invest my money?
There are numerous asset classes you could invest in — stocks/equity, mutual funds, fixed-income securi- ties/bonds, bank deposits, real estate, gold, forex… So let’s say you want to invest Dh100,000, which types of investments would you pick? How would you allocate the amount between the different types? This is where your investment strategy comes into play.
Once you know your risk appetite and financial goals, the next step is to create an investment strategy and design your investment portfolio. You can broadly split portfolio types into three variants, based on the risk you’re willing to take on:
Conservative or low-risk portfolio
As a conservative investor, you would be willing to accept lower returns, in order to maintain low risk of loss. A conservative investment portfolio would mostly comprise of fixed-income investments like bonds and fixed deposits. Just about 10 to 30 per cent of your investments would be allocated towards high-risk growth assets like equities. Aggressive or high-risk portfolio As an aggressive investor, you would have a high-risk tolerance, and would be willing to accept market volatility in return for the possibility of receiving a high return on your investment. So, close to 90 per cent of your investment would be in high risk assets like equities or property. Even within equities, you would be inclined towards investing in smallcap stocks that carry a higher risk like those of newer or smaller companies, since they also offer you the potential of a higher reward. Balanced or moderate-risk portfolio The balanced portfolio, as the name suggests, incorporates a fairly balanced allocation towards high-risk and low-risk asset classes. So anywhere from 40 to 60 per cent of your investment would be channelled into stocks, property and such, and the remaining in fixedincome assets.
Irrespective of which portfolio you pick and how much you’re investing in each asset class, always remember to not put all your eggs in one basket. Diversifying your investments will protect you from market fluctuations, and help you build a solid portfolio. The writer is the founder and CEO of souqalmal.com. Views expressed are her own and do not reflect the newspaper’s policy.