Factors to consider before investing
Things to note before investing
Click here to know your risk tolerance.
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 Islamic 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 capital growth or income, or both?
Your final choice of portfolio solution(s) will depend on whether you have greater emphasis on your savings increasing (in other words, you want capital growth) or providing you with regular payments (a steady income).
Generally speaking, younger investors are normally seeking to accumulate wealth and will be primarily interested in capital growth. By contrast, older investors often rely on the income from their investments to finance some of their day-to-day spending, and will want income to be as high as possible. Other investors may aim for a combination of both.
5. 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 the disposal of a property, or you are looking to invest a regular amount from your salary. You might also prefer to make irregular payments. Your final decision is likely to reflect what is affordable within the overall scope of your finances and what your investment goals are. You can speak to your NBF Relationship Manager for guidance.
6. Do you understand the effect of compounding profit?
Understanding the effect of compounding profit is very important as it is a way to save more money by having your savings work harder in the background during the course of your working career. Below is an example that will demonstrate the power of compounding interest.
If one puts away AED 1,000 per year for 30 years at a profit rate of 10%, this will grow to approximately AED 200,000. In reality, the actual earnings would be around AED 170,000 if you subtract your original AED 30,000 contribution of AED 1,000 for every year.
On the other hand, if one saves AED 30,000 in one lump sum in the beginning of the 30-year period, the total would instead amount to about AED 525,000. Therefore, utilising compounding profit will make a massive difference in your savings.
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.