Investor's Awareness

Speculation vs. Investing vs. Saving

For your convenience, you can access your account, view reports, update your information, submit transactions, and transfer money from your investment account to your bank account through the following channels:

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).

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 from expected. Therefore, Investment Risk is a person’s inability to pinpoint the outcome of an investment, regardless if positive or negative.

Risk: the chance that an investment’s actual return will be different from 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 the 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.