Factors to consider before investing
Things to note before investing
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With so many investment options available, it's important to define your investment objectives before you invest.
Here are six important questions that you should consider before investing:
1. What are your investment goals?
Whether you’re saving for a comfortable retirement, your children’s education or simply a rainy day, our investment solutions offer long-term strategies that can help you achieve your specific goals. It’s imperative that whatever investment choice you make must reflect the life event that you are planning for, as the investment style will determine the returns you can expect over different timescales.
2. What is your attitude towards risk and potential returns?
All types of investment carry various level of risks and potential returns. Typically the more risk you are willing to take, the greater the opportunity for capital growth, but equally the greater the scope for losses.
For example, if you are nearing retirement, you may want a lower-risk approach to lessen the possibility of your final retirement pot being eroded. However, it is worth considering what impact your expected longevity might have on your retirement funding, as it might be appropriate to consider taking the right level of risk for longer.
Alternatively, if you don’t need to access your money for some years, you may prefer a higher risk approach, knowing you can adjust your strategy over time. You should discuss and dynamically adjust the risks you are willing to take with your NBF Relationship Manager.
3. How long do you want to invest for?
Your reasons for investing - from saving for university fees or retirement, to buying a second home or a new car - will influence how long you invest for. It is important to know your timescale. Is it one to three years? Three to five? Or five or more? In general, the longer your investment time horizon, the more opportunity you have to ride out periods of market uncertainty.
4. Do you want to save regularly or invest a lump sum?
It is important to decide on the amount and frequency of your investment. Maybe you have a lump sum from your savings, or you are looking to invest a regular amount from your salary. You might also prefer to make irregular payments. In general, investing in lump sum has the potential to earn more from the compounding effect while staggering the investment over regular contributions smoothens volatility and averages the investment cost. Your final decision is likely to reflect what is affordable within the overall scope of your finances and what your investment goals are. NBF investment offering are flexible in terms of deployment options and you can speak to your NBF Relationship Manager for more guidance.
5. Do you understand the effect of compounding interest?
Understanding the effect of compounding interest is very important as it is a way to save more money by having your savings grow and earn more over time. Compounding enables you not only earn on your capital amount, but to also earn interest on profits from the previous years.
Below is an example that will demonstrate the power of compounding interest:
Consider a savings account that pays 2% every year. If you save AED 100,000 you will have 102,000 at the end of the first year (100,000 x 1.02). In the second year you will earn 2% on the new accumulated amount, so your account at end of year 2 will be AED 104,040 (102,000 x 1.02). Over many years, these earnings will add up and accumulate. The higher the rate earned and the longer the investment period, the larger the effect of compounding will be.
6. Do you understand the importance of diversification?
Diversifying across a broad range of investment strategies, styles, sectors and regions can help cushion the occasional shocks that come with investing in a single asset class. It also enhances the potential for investing in a better performing asset class while spreading the risk of investing in a lower performing asset class.
It has been demonstrated that it is not security or single fund selection that drives long-term returns, but diversification and the dynamic strategic asset allocation that is actually responsible for 90% of long-term performance.
Investors should always remember that diversification does not fully protect you from market shocks and risks.
It goes without saying that the earlier you start, the better you will be prepared for your retirement. Creating an effective savings plan and investing the money in a long-term, well diversified investment solution is the most important step you can take towards this.
Lastly, when those savings rack up as you advance in your career, make sure that temptations to spend on avoidable luxuries or depreciating assets don’t derail you from your goal.
Click here to know your risk tolerance.