Why do You Need a Dynamic Financial Plan Based on Your Age

An investment makes your money work for you. Your savings, despite earning you interest, won’t be enough in the long run to tackle inflation. Planning how you invest makes much difference in fetching you a better return. However, you need to have a thorough understanding of the market in the UAE and conduct proper research. Your investment strategies and asset allocation play an important role in deciding your worth after you retire. New investors are often confused about the right age for investing and the strategies they should apply.

There are no hard and fast rules in investing. Your investment strategies need to change as you grow. A young investor is open to more risks but lacks market knowledge. Similarly, an experienced investor has a better market understanding but lesser time to gain returns. A wise investor understands his needs, risk appetite and plays accordingly. Your investment strategies must be according to your age for getting the desired returns. The article below gives an insight into the best investment strategies according to the age in UAE. 

Asset Allocation and Investment Strategies

New investors must know the importance of asset allocation before making investments. Proper asset allocation knowledge will help them making age-specific investment strategies. There are various classes of assets such as stocks, securities, bonds, etc., each having its level of risks and returns as given below.

  • Stocks - Also known as equities, stocks are issued by a company to raise funds for its business operations. Over the years, stocks have outperformed other investment categories due to higher returns and exponential growth. They carry higher risks and are most prone to market fluctuations.
  • Bonds - Unlike stocks, bonds are typical loans taken from the investors with a guarantee of fixed returns. The bonds are generally issued by states and government organisations to carry out projects and infrastructure development. 
  • Commodities - Commodities are raw materials like minerals, metals, agro-products, etc., in which an individual can invest to gain considerable profits. Commodity trading is one of the oldest forms of investment. 
  • Real Estate - It has become a popular investment vehicle for the last 50-60 years. It includes a variety of sub-classes including buying and selling and flipping houses. Real estate investing is less volatile than stocks and bonds.
  • Cash and Equivalents - Cash and Equivalent are short-term investment vehicles with low returns and come with lower volatility. Cash and equivalents include bank deposit certificates, treasury bills, corporate commercial papers, etc.

In addition to various investment options there are a few saving schemes that provide better returns and are safe options of wealth generation. 

  • Goal Based Savings Schemes - A goal based saving scheme is a type of fixed deposit, that provides a better interest/profit rate in comparison to a normal savings account. Just like a fixed deposit, your investment is locked for a fixed period and you receive interest plus principal amount at maturity. Goal based savings schemes are good for individuals with low risk appetite and elderly who are going to retire within a decade. 
  • Mutual Funds - A mutual fund is an indirect investment into the equities. These funds are considered safer than stock investments and offer a decent return. Since the mutual funds uses your investments into stocks, there are risk related to it. You can invest your funds in lump sum or you can opt for a systematic investment plan (SIP). In an SIP, you need to pay a fraction of your projected investment every month into the mutual funds. Mutual funds are ideal for individuals with low risk appetite who are looking for safer investment option with decent returns.
  • Reccuring Deposits - These deposits work similar to fixed deposits in UAE, however, you don’t need to invest your funds in lump sum. You need to pay your funds in fractions over the fixed tenure just like a systematic investment plan. At maturity, you will get the funds with all the interest accrued. A recurring deposit is one of the safest investment options, just like fixed deposits. These are ideal for individuals looking for safer investments and goal based wealth generation.

The performance of your investment primarily depends on the economy. Each investment category shows a slightly different behaviour with the rise and fall of the economy. An experienced investor chooses the right investment vehicle to maximise returns and minimise losses. When the economy grows, the investors move their assets in stocks which promises a higher return than the other category. On the other hand, they pull back their assets into safer investment options such as bonds in case of an economic downfall. It is also important not to put all your money in a single type of investment as the market is volatile. Diversification makes a strong portfolio and ensures you don’t lose all your money at once. Arranging your investment in the portfolio decides your returns; hence, you need to plan as per your goals and your age.

Investment Strategies for Various Age Groups in UAE

Investment planning is different for a young investor than those closer to retirement. Moreover, personal situations can also impact your investment strategies. It’s better to have adequate liquid cash as a backup if you lose your money in the market. While a young investor can take risks by investing in stocks, a person with a dependent family needs financial security and would prefer bonds over stocks. Following are the best investment strategies according to age. 

For Young Investors Aged 20-30 Years

In general, young investors don’t possess many responsibilities and can go vigorous with investing in stocks. In addition, they can invest in retirement plans which provide exponential growth over the period due to the power of compounding. To play safer or riskier is a personal choice. They should do 70 to 90% of investment in stocks. Remaining, they can invest in bonds, getting a health insurance plan, or goal based fixed deposit. Recommended asset allocation for young investors is as follows.

Investment category Asset Allocation
Stocks (Equities) 70-90%
Bonds/Retirement Plans/Health Insurance/Goal based deposits (Fixed Deposits) 10-30%

Since the investors in their twenties have more time to recover from losses, they can take maximum risks. Investing in retirement plans can also fetch them a good return. All they need to do is define their risk appetite and financial goals.   

For Investors Aged 30-40 Years

Investors in the age group of 30-40 years are more career-oriented and focused on financial security. Generally, individuals in this age group have spouses and kids and their investment strategies must include them in their planning. Although earning better than your twenties, a significant part of your earning will go into family expenses. Your scope of risk-taking reduces and you need to deviate a little towards safer investments options. At this age, you can still benefit from the power of compounding and retirement plans can be an effective choice. You can also buy term insurance or plan a goal-oriented saving. Here is the recommended asset allocation for investors aged 30-40 years. 

Investment Category Asset Allocation
Stocks (Equities) 50-70%
Bonds/Term Insurances/Retirement Plans/ Fixed Deposits/Recurring deposits 30-50%

Investors in their thirties need to focus on contributing towards their retirement. They should reduce their risk appetite and shift towards safer options for financial securities. 

For Investors Aged 40-50 Years

Investors in the age group of 40-50 need to focus on safer investment options and savings. They need to be serious about financial management as they need to manage bigger expenses like college fees for kids or their marriage expenses. Losing money at such stages can be devastating and detrimental to their future plans. Therefore, they need greater financial security. In addition, their age is prone to getting critical illnesses, so they can opt for health insurancewith critical illness cover. Following is the recommended asset allocation for investors aged 40-50. 

Investment Category Asset Allocation
Stocks 40-50%
Bonds/Critical Cover Insurances/Goal Saving plans 50-60%

With around 10-20 years of employment remaining, they still have some scope of risk in the stocks. However, they need to plan according to their situation and forthcoming expenses. Getting a fixed deposit in UAE can fulfil expenses for their child’s education or marriage. Or, they can also opt for a recurring deposit with systematic investment plans that won’t burdentheir pockets.

For Investors Aged 50-60 Years 

Individuals in the age group of 50-60 are almost approaching retirement. They need to focus on stable and low earning funds like money market and bonds. Riskier stocks can deplete their funds accumulated over time. In addition, various goal-oriented saving plans won’t be as beneficial due to lesser investment tenure. However, if you have adequate liquid funds and are capable of bearing losses, stocks (equities) are still an option. You can apply your market understanding to avail of additional returns. Recommended asset allocation for the investors in the age group of 50-60 is as follows.

Investment Category Asset Allocation
Stocks 30-40%
Bonds/Money Market/Mutual Funds 60-70%

For Investors Aged 60-80

Investors above the age of 60 years are likely to retire or have already retired. They need to focus more on income than growth. They can invest in stocks or mutual funds with dividends options and can ensure a regular income Increasing bond holdings or fixed deposits for shorter tenures are also a better choice as it is secured and provides better returns than saving plans. They can shift towards liquid instruments to manage health expenses in emergencies and allocate a small percentage in stocks for some financial growth. Following is the recommended asset allocation for investors aged 60-80. 

Investment Category Asset Allocation
Stocks  10-30%
Bonds/Money Market/Liquid Funds 70-90%

Buying life insurance for individuals aged 60-80 is not beneficial as they are less likely to support their families financially. However, a health insurance plan is important for senior citizens and they should have a pre-existing health insurance plan.

The Bottom Line

Individuals, whether new or experienced, need to have dynamic planning to maximise their growth. It is important to shift investment strategies according to age to ensure proper asset allocation. Considering your financial goals, risk appetite and age, you should make an effective asset allocation that sustains your financial growth in the long run. 

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