Developing a tailored personal financial plan – and sticking to it – is vital for your personal and family financial well-being. Gautam Duggal, Regional Head of Wealth Management for Africa, the Middle East and Europe and Head of Wealth Management for the UAE, Standard Chartered Bank, how to get it right.
The saving plan and personal wealth
The amount of money you put aside for your future has a direct link to the amount of money you will have to spend in the later stage of your life.
Regular saving and investing is one of the best strategies for long term investing – it encourages discipline; it mitigates the risks of market timing and is an effective way to compound investment returns
Unfortunately, many people start thinking of savings at a later stage of their career, when in fact the best time to start saving is in the early to mid-cycle of one’s career.
For instance, someone who starts investing with a modest sum of AED 10,000 per year at the age of 26; assuming an average growth of 9% p.a. his wealth could grow close to AED 3 million by the time he/she is 65 years old.
However, if the same individual starts investing at the age of 35, assuming the same growth rate; his wealth would grow to AED 1.3 million. That is a substantial difference. Therefore, the theory “earlier, the better” holds true when it comes to savings.
By saving a monthly amount into an investment portfolio, you can smooth out the highs and lows in asset prices, a concept known as dollar cost averaging. Dollar cost averaging is an effective tool to invest over long periods of time and take advantage of volatile markets. This, added with the compounding factor, ensures regular savings are a very effective form of investing – turning your surplus income into real wealth.
No two people have the exact same goals. That’s why it takes an individually tailored financial strategy to make your goals a reality. The place to start with is to have a budget. Build into the budget the lifestyle choices. Once you decide you’re happy with your chosen lifestyle and can afford it, then saving a certain portion of the income becomes possible and sustainable. Committing to saving your income increases to building your real wealth.
In terms of which asset classes your savings should be allocated to, it’s a function of how much time period you have to achieve your investment goals. One needs to understand their goals and objectives to ensure short, medium and long term planning. Once this is set in place, asset allocation becomes easier. Asset allocation is the process of deciding how to divide your investment dollars across several asset categories. Stocks, bonds, and cash or cash alternatives are the most common components of an asset allocation strategy.
One more important point to consider when designing an investment portfolio is to have an allocation to alternative strategies. One of the main advantages of investing in alternative strategies is its low correlation to conventional asset classes such as equities and fixed income. In times of equity market stress and market volatility, alternative strategies have proven to partially insulate portfolios from market volatility.
Dividing savings for growth in investment planning
As stated earlier, the greater the time horizon, the more risk you can afford to take.
The old rule of thumb used to be that you should subtract your age from 100 – and that’s the percentage of your portfolio that you should keep in stocks. For example, if you’re 30, you should keep 70% of your portfolio in stocks. If you’re 70, you should keep 30% of your portfolio in stocks
For a growth oriented portfolio, the investment should be tilted higher towards global equities. One should also invest in high yield fixed income securities such as High Yield bonds which offer a higher yield to investors.
However, one should not forget the benefits of diversification. Equity and High Yield Bond allocations come with greater market volatility. Therefore, one should always keep a certain portion in high quality fixed income funds for portfolio stability, a portion in alternative strategies to reduce portfolio volatility and sensitivity to conventional markets.
Top growth products for savings growth
Regular savings plans allow clients to take advantage of a well-constructed, disciplined long-term investment program to be in the best position to achieve their goals. Growth products typically carry high volatility but also enable one to earn higher return than average over the long term. Some of the top growth products include Direct Equities; Equity based Mutual Funds and High Yield Bonds.
One could also look at investing into insurance plans should one have long term needs which work fairly similarly to regular savings plans.
Advisory options for consumers: Institutional bank face-to-face versus and digital and online
The most important channel is the “in-person interaction” complemented by multi-channel approach to relationship manager via mobile, online and telephone “anytime, anywhere”.
As wealth managers and private banks enact their digitization strategies, a number of new models for advisory business can be seen to emerge. The challenge lies in the ability to build such capabilities in a way that still enables agility in delivering client value, while delivering on cost efficiency at the same time.
Advisory is available in the following broad categories:
- i) The enhancement of the personal advisor relationship with digital technology
- ii) The automated advisory
iii) The hybrid advisor model
Preferred channels of savings advisory for Middle East investors
The arrival of automated advice, and the development of digital offerings across asset and wealth managers, ensures easier execution for clients to bypass their advisors in implementing investments and to avoid general interaction with them. Recent times have seen clients going directly to the companies that are providing the services and products that they need, without an intermediary.
However, the traditional personal advisor route is still the most preferred channel here in the Middle East. The other important point to note is that most of the people in the Middle East typically choose to invest in real estate and/or in bank fixed deposits; both areas where the personal advisor is still the most relevant channel.
Reinvesting savings income in the Middle East
Foreigners living in the UAE remitted Dh43.5 billion in the first three months of 2018 compared with Dh37.1bn a year earlier, according to state-run UAE news agency WAM.
The UAE issued landmark changes to its laws. The changes and reforms, which took effect by the end of 2018 were a departure from a model in which foreign investors had to seek local partners to set up businesses outside free zones. Non-citizen workers are expected to leave once their employment ends and many send their earnings to their home countries. The announcement is expected to bolster economic growth and offer a more attractive environment to foreign investors and skilled workers as the UAE continues to find sources of revenue beyond oil.
The new ownership rules are expected to encourage expatriates to keep more of their earnings in the country. This is a major development and could lead to changes in attitude over the coming years and help reduce remittances and increase investments within the Middle East.
The potential for personal wealth growth in the UAE
According to a recent article published in Khaleej times on October 3, 2018; UAE wealth is set to grow 51% to AED 5.14 trillion by 2026 and this growth is expected to come from local financial services and professional services (apart from strong HNW migration). Out of USD 925 billion wealth held by UAE residents, 51% of this wealth comes from HNW with wealth of USD 1 million and more.
This creates an opportunity for financial institutions to create awareness about savings amongst the residents so that a hefty spending culture can be limited at the expense of saving more for our future financial needs.