There are only two ways to make money :

  • By working and/or
  • By having your assets work for you.

One of the most compelling reasons for you to invest is the prospect of not having to work your entire life!

If you keep your money in your bank account instead of investing it, your money doesn’t work for you and you will never have more money than what you save.

By investing your money, you are getting your money to generate more money by earning interest on what you put away or by buying and selling assets that increase in value.

Whether your goal is to send your kids to college, buy a home, or to retire comfortably, investing is essential to getting you where you want to be.

Whether you invest in stocks, bonds, mutual funds, options and futures, precious metals, real estate, your own small business , or any combination thereof, the objectives are the same :

  1. Preserve your wealth
  2. Grow your wealth
  3. Generate additional income

Speculation vs. Investing vs. Saving

Saving: Putting your money in a saving account or cash deposits.  Returns from savings are usually what the bank pays you before lending your money to someone else; so your returns must be less than what the bank charges for a loan.

Investing: Putting your money into listed stocks, properties, or your business with the expectation to receive profits or sell these assets for a higher price.

Speculation: Seeking to make abnormally high returns from bets that can go one way or the other.  Those, speculators only trade on assets with high volatility (Risk).

  Saving Investing Speculation
Goals Short-term: (3 years or less)

For example: vacations, emergency money, car, etc.)

Long-term: (3 years or more)

For example: retirement, buying a home, kids college education, etc.

Very short-term: (90 days or less)

Buying and selling to achieve capital gain

Liquidity High Low High
Risk Low Medium – High Extremely High
Return Interest Interest, Profit, Capital gain Capital gain
Asset Class Cash Equity, Fixed Income, Real Estate, etc. High volatile assets

 

Risk and Return

The main two factors you should be aware of when deciding whether to save, invest, or speculate are Risk and Return.

Risk: the chance that an investment’s actual return will be different than expected. Therefore, Investment Risk is a person’s inability to pinpoint the outcome of an investment, regardless if positive or negative.

There are many types of Investment Risks, but the most common type that many people tend to overlook is “Concentration Risk”.  Concentration Risk is putting your money in one asset class or few securities.

Return: the return from the investment that could be positive (profit) or negative (loss).  There are 3 determinants of a portfolio’s return:

  1. Asset Allocation: diversifying your money among different asset classes and securities
  2. Security Selection: Seeking under-priced asset and hope its market price will go up to its intrinsic value before selling it for higher price
  3. Market Timing: Trying to predict best time to buy or sell an asset.

The Asset Allocation method has proven to be the best method with 94% success rate.

Mutual Funds

A mutual fund is a collection of stocks and/or bonds that is funded by investors (like you) with clear strategy and is professionally managed.

Mutual funds offer small investors (< SAR 20 million) the ability to hire a professional fund manager with a very small fee (usually < 2%  per year)

Almost every fund manager in Saudi offers mutual funds with similar strategies.

However, an investor should be aware that there are mutual funds that are conventional or Shariah compliant. Even thou they invest in the same market, however, their Benchmarks and or strategies are different.

An investor should invest in a mutual fund that fits with his strategy and preference.

 

Evaluate Performance

Many investors, when assessing performance, make common mistakes by using “Absolute Performance” rather than “Relative Performance”.

Absolute Performance: seeking positive return regardless of benchmark return.  For example, an investor expects 10% return regardless if market is up or down.  This could pressure your fund manager to take extra risk in order to deliver positive returns.

Relative Performance : seeking reasonable return above benchmark’s return.  For example, an investor expects 3% return above benchmark.

If benchmark return is 10%, investor expects 13%;
If benchmark’s return is -10%, investor expects -7% returns.

Investor should always base their decision when assessing mutual fund or fund manager’s performance on the Relative Performance.

 

Benchmark

A benchmark is a standard against which the performance of a security, mutual funds, or a fund manager can be measured.

Therefore, if you want to know if a mutual fund is performing well or not, compare its long-term performance (3 years or more) with the benchmark performance.

If you want to compare the performance of 2 or more mutual funds, make sure they have the same benchmark and strategy.  For example:

  • You should not compare 2 mutual funds invest in Tadawul, but one is sharia compliant and the other is conventional (two different benchmarks)
  • You should not compare 2 conventional mutual funds invest in Tadawul, but one has growth strategy and the other is income strategy (two different strategies)

Benchmarks are an amazing tool to evaluate performance ; however, you should also consider the risk factor.  You can have a mutual fund outperforming a benchmark, but with higher risks or vice versa.

Would you like to learn more about investing?

Please visit CMA Awareness Center

What’s the investment process?

Investing is a continuous process that starts from setting up an investment strategy, execution, monitor and assess your performance.
Discuss your Goals:
  • Define your long term goals (retirement lifestyle, kids’ college, kids’ homes, inheritance, etc.)
  • Determine your annual income and expenses (cash flow)
Assess your Current Portfolio:
  • Guided by your risk appetite and your goals, explore the mix of asset classes that are right for you
  • Strategic Asset Allocation is defined
Implement Strategic Actions:
  • After analyzing your existing portfolio, convert your current portfolio to match your strategic asset allocation
  • Pick the asset classes that fits your strategy
  • Pick the markets (international, regional, or local) that you prefer to invest in
  • Pick the securities that supports your strategy
Manage:
  • Review your portfolio every 3-6 months and make “tactical” adjustments to benefit from market fluctuations and economic conditions
  • Adjust your strategy frequently as your goals are changing

Where to invest?

Once you have decided on your strategy for goals, the next action is to allocate your money into the asset classes that will help you achieve your goal.  The main 4 Asset Classes that you can invest in are:
  1. Cash or “Money Market”
  2. Fixed income “Bonds or Sukuks”
  3. Equities – Public Listed Companies or Private Companies
  4. Alternatives “Real Estate, etc.”
Each Asset Class has different Risk and Return profiles.  Almost every investor should have at least 2 or 3 Asset Classes in his portfolio depending on its size. Every Asset Class should have at least 5 to 10 Securities.  For example, if you are investing in Equities, you should diversify your investment into at least 10 companies in different sectors and/or different markets (local, emerging, or developed)

How to invest?

Once you have picked your Asset Class and/or the market you want to invest in, the next step is deciding on how to invest. There are 2 ways to invest in a Security:
  1. Direct Investment (You buy the security directly. For example, you setup a stock portfolio and you or your fund manager buys and sells stocks directly)
  1. Indirect Investment (you invest through Mutual Funds where the Mutual Fund owns the security and you own a “Unit” in the Mutual Fund)It is strongly recommended that you hire a fund manager to manage your investments or invest through Mutual Funds for the following reasons:
    1. Fund managers possess the knowledge to analyze markets and predict earnings that will determine stock prices
    2. Fund managers work full time to monitor markets and assess performance
    3. Fund managers have tools (i.e. computer programs) that help them make informed decisions about ratios, risk, and performance simulation
    4. Fund managers always make decisions based on fundamental analysis, unlike investor whose their decisions are often influenced by their emotions towards their portfolio performance

How can I determine my Risk Profile?

Knowing how much investment risk you can tolerate is the 1st step before investing.  This has been the most difficult question in the investment process.  However, ICAP has put together a questionnaire that will help assess your risk profile. To use our Risk Profile Form, please follow these steps:
  1. Click here and answer all questions.
  2. Add the scores next to each answer
  3. Compare your score to the Risk Profile Table
    1. < 30: your risk profile is “Conservative
    2. 30 – 80: your risk profile is “Average
    3. > 80: your risk profile is ”Aggressive

What are the Asset Classes that I can invest in through ICAP mutual funds?

ICAP offers wide range of asset classes in different markets. Please visit Asset Management page under Products & Services section.

How to diversify my investment among ICAP funds?

To answer this question, ICAP Investment Advisor needs to meet with you and go over all the information needed to setup your strategy and build your portfolio.  Please Click here to reach us.

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