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Basics of Investment

Let us educate you about building your portfolio.

What is Investing?

It’s actually pretty simple: investing means putting your money to work for you–actually, it’s a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And so that’s what most of us do. But there’s a limit to how much we can work and how much money we make out of it–not to mention the fact that having a bunch of money is no fun if we don’t have the leisure time to enjoy it.

So, since you cannot create a duplicate of yourself to increase your working time, you need to send an extension of yourself–your money–to work. That way, while you are putting in hours for your employer, sleeping, reading the paper, or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime, or look for a higher–paying job.

There are many different ways you can go about making an investment. This includes putting money into stocks, bonds, mutual funds, real estate, gold etc. The point is that no matter the method you choose to invest, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it’s the most important concept for you to understand.

Develop a Portfolio Strategy
Why Invest?
Understanding your Needs
Investment Objectives
Time Frame
Risk Profile

Develop a Portfolio Strategy

Based on your objectives, their investment horizon and your risk profile, we will help you identify an ideal asset allocation strategy for each of your goals. This means, for each of your goal to be achieved in what types of asset classes you should invest in.

Generally, the longer the time you have to achieve a certain objective, you can invest a larger portion of your money in considerably riskier investments. Similarly, the less time you have to achieve your objectives, the less proportion of your money shall be invested in risky assets.

Why Invest?

Obviously, to earn more money. However, investing is becoming less of a luxury and more of a necessity. For the average person, investing is the only way they can retire while still maintaining their standard of living.

By planning ahead you can ensure financial stability when you retire.

Understanding your Needs

Even though investors are always trying to make money, they come from diverse backgrounds and have different needs. Therefore investment solutions and methods should be personalized for each investor.

We will explore three main factors that determine the optimal path for an investor:

-Investment Objectives

-Time Horizon

-Risk Profile

Investment Objectives

Investors have a few primary objectives: safety of capital, regular /stream of income, or capital appreciation amongst others. These objectives depend on a person’s age, stage or position in life, and personal circumstances.

A 65-year-old widow living off her retirement savings is far more interested in preserving the value of investments than a 33-year-old business executive.

The widow needs income from her investments to survive, she cannot risk losing her investment, However the young executive has time on his side and can therefore take more risk.

Time Frame

As a general rule, the shorter your investment horizon, the more conservative you should be.

If you are investing for a long-term objective like retirement and you are still young, then you have time to be more aggressive in your approach and invest in high risk-high reward asset classes like stocks. At the same time, if you start young, you have the power of compounding on your side!

On the other hand, if you are about to retire, then you may opt for a more conservative approach as the opportunity to recover losses on your investments is limited in case of any losses and therefore it is critical to be safe.

Risk Profile

When investing, you need to know how much volatility you can stand to see in your return on investments.

Figuring this out is difficult, but there is some truth to an old investing maxim: you’ve taken on too much risk when you can’t sleep at night because you worry about your investments.

Ask your investment advisor to conduct a thorough risk profiling for you to help make more informed investment decisions

Types of Investment

Sukuks & Islamic Bank deposits
Stocks
Mutual Funds

The term ‘Sukuk’ is commonly used to refer to any form of Shariah Compliant investment founded on debt. When you purchase a Sukuk, you are lending out your money to a company or the government which invests your money in Shariah Compliant avenues. They agree to give you return on your investment and eventually pay you back the amount you lent them.

The main attraction of sukuk and other debt instruments such as bank deposits is their relative safety. However due to the safety and stability there is low risk and low potential return compared to other investment instruments.

When you purchase stocks (or ‘equities’), you become a part-owner of the business. This entitles you to vote at the shareholder’s meeting and allows you to receive any profits that the company allocates to its owners (also known as dividends).

While Sukuks/ Islamic bank deposits and other Shariah Compliant debt instruments provide a steady stream of income, stocks are volatile. They fluctuate in value on a daily basis. Compared to the Islamic debt instruments, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.

When you buy a mutual fund, you are pooling your money with a number of other investors, which in turn enables you (as part of a group) to pay a professional manager to select specific securities for you.

Mutual funds are set up with a specific strategy in mind, and their distinct focus can be nearly anything: stocks, sukuks, other Shariah compliant debt instruments, Islamic bank deposits, gold, real estate, etc. The primary advantage of a mutual fund is that you can invest your money without needing the time or the experience in choosing investments.