How investing can lead to financial security and reduced anxiety

As a certified and award-winning investment adviser for over 15 years, I've witnessed firsthand how sound investments can contribute to both financial growth and reduced anxiety about the future.

In this edition of 'Mind Your Money', we delve into the realm of stock market investing, exploring the reasons behind investment hesitations, debunking myths, unveiling astounding statistics that underscore its transformative impact and how to get started on the path to financial security.

The journey of embracing stock market investing is driven by knowledge, strategy, and action. By understanding these statistics, you gain insight into the landscape of wealth creation.

* Global participation: With the US witnessing 58 per cent population engagement, the benefits of stock market investing are being reaped by a significant portion of the populace.

* Potential in contrast: India's three per cent participation rate highlights an immense opportunity for individuals to unlock the potential of stock markets in a rapidly growing economy.

* Monumental valuation: The $120 trillion valuation of global stock markets reinforces the scale of wealth creation achievable through strategic investments.

* Exceeding expectations: The consistent delivery of 10 per cent average annual returns underscores the reliable growth potential within stock markets.

* A decade of excellence: The remarkable 13 per cent annual returns over the last 10 years testify to the current momentum, affirming stock market investing's role in securing financial prosperity.

Why people don't invest

There are many reasons why people don't invest. Some people are simply afraid of losing money. Others don't understand how investing works. And still others don't have the time or resources to do the research necessary to make sound investment decisions.

Whatever the reason, not investing can have a significant negative impact on your financial future. Inflation is running at five per cent, which means that your money is losing value every year. If you don't invest, your savings will be worth less and less over time. We’re more likely to make mistakes of omission, not commission.

How to overcome your fears of investing

If you're afraid of investing, the first step is to educate yourself about it. There are many resources available to help you learn about investing, such as books, websites, and financial advisers.

Once you understand how investing works, you can start to overcome your fears. Remember, investing is a long-term game. You're not going to get rich quick, but over time, your investments can grow significantly.

How to get started investing

If you're ready to get started investing, there are a few things you need to do. First, you need to set your financial goals. Understand your willingness, ability, capacity and capability to take risk. What do you want to achieve with your investments? Do you want to save for retirement? Buy a house? Pay for your child's education?

Once you know your goals, you can start to choose investments that are appropriate for you. There are many different types of investments available, so it's important to do your research and choose investments that align with your risk tolerance and time horizon.

As a rule of the thumb bank deposits, high yielding savings accounts, corporate deposits and bonds are considered safer allocations while developed market index or large cap company stocks, ETFs, mutual funds are considered growth allocation, but avenues like cryptocurrencies, NFTs, hedge funds, small cap, penny stocks, emerging market stocks and related funds are considered aggressive allocations.

The basics of investing

There are a few key concepts that every investor should understand. These include:

* Goals: What are you investing for? Retirement? A down payment on a house? A child's education?

* Objectives: What kind of return are you looking for? Are you willing to take on more risk for the potential of higher returns?

* Asset allocation: How will you divide your money between different asset classes, such as stocks, bonds, and cash?

* Risk management: How will you protect your investments from losses?

* Discipline: Will you stick to your investment plan, even when the market is volatile?

* Consistency: Will you invest regularly, even when you don't feel like it?

Cognitive errors and emotional biases

When it comes to investing, it's important to be aware of the cognitive errors and emotional biases that can impact your decision-making. These include:

* The availability heuristic: This is the tendency to make decisions based on the information that is most readily available to you. For example, if you recently lost money on a stock, you may be more likely to avoid investing in stocks in the future.

* The confirmation bias: This is the tendency to seek out information that confirms your existing beliefs. For example, if you believe that stocks are a risky investment, you may be more likely to pay attention to news stories about stock market crashes.

* The anchoring bias: This is the tendency to rely too heavily on the first piece of information you receive. For example, if you're told that a stock is worth $100, you may be more likely to pay that price for it, even if it's not a good value.

* The fear of missing out (FOMO): This is the fear of missing out on a good investment opportunity. This can lead you to make impulsive investment decisions that you may later regret.

How does one become wealthy?

When one buys compounding assets or allocate money into creating assets that grow over time or provide passive income. Compounding assets are assets that earn money on their own. For example, stocks can earn dividends, which are then reinvested to buy more stocks. Over time, this can lead to significant growth in your wealth.

It’s imperative to accept that a person with high income and no investing runs out of money during retirement, however another person with low income who starts investing early will be financially secured at the time of retirement. The moral of the story is that it's never too early to start investing. Even if you don't have a lot of money to invest, every little bit counts. So start investing today and let your money grow over time.

Here are few cases that we should take inputs from:

* A young couple with high-paying jobs: They earn a combined income of Dh360,000 per year, but they don't invest any of their money. They spend all of their income on their lifestyle, such as buying a new car, going out to eat, and travelling.

* A single mother with a low-paying job: She earns Dh120,000 per year, but she invests Dh2,000 per month in an ETF. She knows that she needs to save for retirement, so she's committed to investing even though she doesn't have a lot of money to spare.

* A middle-aged couple with a comfortable income: They earn a combined income of Dh600,000 per year, and they have a lot of money saved. However, they don't invest any of their money. They're afraid of losing money in the stock market, so they keep their money in cash.

* A young couple in their 30s with a modest income: They earn a combined income of Dh450,000 per year, but they invest Dh5,000 per month in a balanced diversified fund. They know that they can afford to invest more, but they're starting small and gradually increasing their investment amount.

It is important to remember that investing is a long-term game. It takes time for your investments to grow. But if you start early and invest regularly, you can achieve financial security and peace of mind. There is no one-size-fits-all answer, and the best approach for you will depend on your individual circumstances and goals. We can also understand how investing can help you achieve financial security. The sooner you start investing, the more time your money has to grow. And the more you invest, the more money you will have in the future.

Here are the Dos and Don'ts for first time investors:

Dos:

1. Set financial goals: What are you investing for? Retirement? A down payment on a house? A child's education? Knowing your goals will help you choose the right investments.

2. Do your research: There are many different types of investments available, so it's important to do your research and understand the risks and rewards of each one.

3. Start small: You don't need to invest a lot of money to get started. Even a small amount invested regularly can grow over time.

4. Get professional advice: If you're not comfortable investing on your own, consider working with a financial advisor. A financial advisor can help you create a personalised investment plan that meets your needs and goals.

Don'ts:

1. Don't try to time the market: It's impossible to predict when the market will go up or down. The best way to invest is to dollar-cost average, which means investing a fixed amount of money regularly, regardless of the market conditions.

2. Don't panic sell: When the market goes down, it's tempting to sell your investments. But this is usually the worst thing you can do. The market will eventually go back up, and you'll end up losing money if you sell.

3. Don't chase returns: Don't invest in something just because it's had a good run in the past. There's always the risk that the trend will reverse.

Investing can be a daunting task, but it's important to remember that it's a long-term game. By setting financial goals, doing your research, and starting small, you can set yourself up for financial success. I hope this article has helped you understand the importance of investing and how to get started.

Sandeep S. Jadwani - ACSI, CIB (Head of Investment Advisory, Habib Investment Limited – Regulated by DFSA) is a qualified, experienced and award-winning financial adviser. He has been in the UAE for over 15 years, guiding individuals to efficiently and effectively manage their finances to achieve their financial goals. He believes financial fitness can ultimately lead to mental fitness and physical fitness.

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