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Why grow your wealth?

There are several reasons why someone should look to grow their wealth retirement and children’s education are examples of two these. Another very important reason people don’t typically consider is the economic factor called “Inflation”. Simply put, inflation is a rise in prices relative to money available. In other words, you get less for your money than you used to.

Here’s an example:

You buy a loaf of bread for AED 10. A year later, you go to buy the same loaf of bread but and it’s AED 13. You still have only AED 10, but the price of the loaf of bread has gone up. We can say that inflation is at work. The price of that loaf of bread has been inflated. People usually refer to inflation when they talk about the prices of large-ticket items, like cars and houses and stocks. But inflation also affects things like groceries and house supplies. It can also affect things like house payments and rent.

When inflation rises but people’s paychecks don’t, this means that people have to spend more of their money to buy the same things that they used to be able to buy.

Inflation simply erodes the value of your money. The inflation rate is different in different parts of the world, for example the inflation rate in the UAE is approximately 2.5% compared to Egypt at 11%. So in short, if you don’t make a higher rate on your money then the inflation rate you are actually losing money.

 


 

How to plan your growth:

The first step to grow your wealth is to understand your own risk profile. Your personal risk profile helps you understand the kind of investor you are and what your risk appetite is. Your risk appetite has a direct correlation to the different options you should consider when looking to grow your wealth. Your risk rating is deciphered by going through a risk profile which gives you a rating.

The rating you get after filling out a risk profiling tool will segregate you into one of three unique groups of investors.

 


 

Typical Portfolio Allocation According to Risk Profile:

Required to grow:

Now that you know your risk profile the next step is to understand the different investment options available to you.
The three risk categories will have different investment opportunities one can consider.

The three risk categories will have different investment opportunities you can consider.

Conservative Investor should look at:
• Certificate of Deposit
• Capital Guaranteed Products

Moderate Investors should consider:
• Certificate of Deposit
• Capital Guaranteed Products
• Bonds
• Mutual Funds (Bond)

Aggressive Investors will invest in:
• Certificate of Deposit
• Capital Guaranteed Products
• Bonds
• Mutual Funds (Bond)
• Equities
• Mutual Funds (Equity)

 

A little bit more about these opportunities:

Certificate of Deposit
A CD is typically a saving certificate entitling the bearer to receive interest. A CD bears a maturity rate and a specified fixed interest rate and can be issued in various currencies and denominations.
Capital Guaranteed Products
A capital guaranteed product gives clients an opportunity to protect their capital at maturity by investing in a wide array of different asset classes and themes.
Bonds
A bond is issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer does not gain any kind of ownership rights to the issuer, unlike in the case of equities.
Mutual Funds
A mutual fund is an investment security type that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. These underlying security types, called holdings combine to form one mutual fund, also called a portfolio.
Equities
A share of a company held by an individual or group. Companies raise capital by issuing stocks which entitle the stock owners (shareholders) to partial ownership of the company. Stocks are bought and sold on what is called an exchange. There are several types of stocks and the two most typical forms are preferred & common stock.

 


 

Manage your risk better through diversification:

Once you know your risk profile and the products you want to invest in, you will need to know how to diversify yourself.
The most important thing is not to put all your eggs in one basket. It also requires a realistic awareness of your financial position and some insight into your future requirements which you now are aware of after completing the risk profile. Most people secure their money in a number of different places, which not only ensures that their risk-reward profile is met, but also allows other needs to be covered for both the short and the long term. Investing in equities subjects you to the stock market’s volatility, but offers opportunities for long term capital growth. On the other hand, cash investments offer stability and security but you are unlikely in the long term to achieve a return which keeps pace with inflation.

Diversification is a portfolio strategy designed to reduce exposure to risk by combining a variety of investments, such as stocks, bonds, and others, which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio. Volatility is limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.

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