This article explains the benefits of investment diversification and simple ways to achieve investment diversification across asset classes.

When it comes to financial management, no single investment will continually outperform all other investments all of the time. To minimise potential losses and to smooth your investment returns over the longer term, you should spread your portfolio across various investments. But that can be easier said than done, so here are different ways to diversify.

Diversify across asset classes

Asset classes are the broad categories of investments and include equities, property and cash investments. Equities include both Australian and international shares. While property includes residential, retail and commercial properties.

Lower risk asset classes, like cash protects your capital during adverse market conditions. On the other hand, higher risk assets, such as Australian and international shares, can deliver good returns during the boom times. Holding a mix of asset classes may help to provide more stable returns over the medium to longer term as markets rise and fall.

Diversify within asset classes

This could mean spreading your share portfolio across different industry sectors because certain sectors may outperform others over a given period according to economic conditions.

Two good examples are mining and manufacturing. The Australian resources industry helped keep Australia’s economy a shining light against a gloomy international backdrop following the Global Financial Crisis. Manufacturing, on the other hand, struggles with high labour costs making Australia less competitive against low income countries such as China. The future is uncertain, and both of these industries are facing volatile conditions. So, a balance across industries is crucial to maintain stable returns over the medium to long term.

It can be simple

Even with a relatively modest amount to invest and very little time, you can achieve a balanced portfolio with the right mix of investments.

Managed funds offer easy access to a wide range of investments. By investing in a managed fund, professional fund managers select individual investments for you. In addition, most managed funds offer several different options to cater for varied levels of investment risk.

Other options include purchasing shares in Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) on the stock exchange. Depending on its charter, a LIC holds shares in a wide range of companies. While ETFs invest across all stocks making up a particular index, such as the S&P/ASX 200. Buying shares in an ETF or LIC gives you exposure to all the stocks held by the fund.

There are many benefits of investment diversification. At Hejaz Financial Services, our Halal Managed Funds are fully diversified, managed professionally and Sharia compliant. Our fund managers have a breath of experience and they are carefully and consistently monitoring your investments. We are focused on taking your return on investment to a whole new level, learn more here.

There are several important things to consider when you are buying a property, it will be one of your biggest investments so make sure there are no surprises when you move in. This property buyers guide will list 6 things to take note of before you make the purchase.

1. Checking the title

A title is a short name for “Certificate of title”. The title gives details about the registered owner and details of any easements, mortgages, covenants etc.

Check:

• whether there are any easements – an easement is something that restricts the ability to use the land, for instance, a driveway through your property to neighbours;
• details about any mortgages; and whether there is a caveat – this is a warning sign that alerts you that someone else claims an interest in the property
• If there is a mortgage or a caveat, it does not mean the property cannot be sold, but to give you a “good title” they must be removed by the seller before, or at, settlement. Remember, most properties have a mortgage that the seller will pay off with the money from the settlement.

2. Types of title

There are a number of different types of titles used throughout Australia. For example:

Torrens title – this is the most common title and gives the buyer a guarantee of “good title” because the title is registered.

Strata title – this is used for many flats, units and multiple living areas such as retirement villages. You usually get a title for your individual unit as well as one for your parking space (if you get one). You also have responsibilities for the common area through a structure called a body corporate.

General law or old system title – this was the original type of title used. There are not many general titles left.

Company title – under this structure you don’t own a title; you are allocated shares in a company that owns the title. When you sell your unit, you transfer your shares in the company. This is also less common now.

3. Buying off the plan

This is common in today’s property market, especially for inner city apartments and large developments. ‘Buying off the plan’ refers to buying a property before it is completed. The deposit that is paid secures the property and the contract, and the balance is paid when the property is completed.

Make sure you know:

• What the property will look like when it is completed;
• That you have somewhere to live during the construction of the building; and
• Whether the developer has a track record or their work is available for inspection.

4. The local council

Check whether:

• there is a vacant block of land next to or near the property and if there are any plans for a block of flats or apartments to be built next door. This might allow the neighbors to look over your back yard;
• there are any zoning or building restrictions on the property;
• the property is properly zoned for your use;
• there are any buildings or other structures that were built without a permit;
• wiring and plumbing have been legally connected.

5. The statutory authorities

Make sure you check with the statutory who can tell you:

• whether they have any interest in the property you want to buy; or
• whether there is something that is going to happen in the area that might affect your use of the property.

You should always get these certificates, even if it seems to be a waste of your time. You will want to know:

• the “adjustments” on the purchase price resulting from unpaid or unused rates and taxes;
• if there is some reason you will not be able to use the property in the way you intend, for example, if you want to renovate;
• whether there are any major works, like freeways, to be built in the area; and
• whether there are services, like gas and electricity available.

6. The cost

The potential costs include:

• Property and pest checks
• Title searches and rate certificates
• Legal / conveyancing services
• Finance costs
• Stamp duty (you may be eligible for an exemption, contact your State Revenue Office for details)
• Land titles office – registration fees

To ease the burden – make sure you read about government grants for new home buyers.

After going through this property buyers guide, we hope that you learned more about one of your biggest investments and that your home purchase will go smoothly.

At Hejaz Financial Services we offer Islamic home finance for your property. Obtaining Islamic home finance isn’t as hard as you think, we take the stress out of planning, budgeting, and paperwork so you can focus on the important finishing touches for your new home. We have helped countless families finance their dream home, and you are no exception.

Learn more about our home finance here.

With the wide choice of investment options available today, choosing your investment strategy becomes a difficult task. You can choose from single sector funds like Australian share and international share funds, or diversified or multi-sector funds that include a mix of sectors like shares, cash and property.

Here are some factors to consider before choosing your investment strategy.

Investment types and risk

All investments carry some level of risk. The type and degree of risk will vary depending on the investments you choose. The trade-off for higher risk is usually a higher potential return.

Risk is typically measured in terms of the likelihood of achieving a negative return in any one year – the higher the risk level of an asset class the higher the likelihood of achieving a negative return.

Higher risk asset classes like shares are long-term investments, which means the longer you invest the less likelihood of your investment value falling. Not taking sufficient risk can be a risk in itself. For example, cash investments are less likely to grow over time and may not meet your long-term objectives.

Diversification

Spreading your money across a range of investments is one of the best ways to reduce your exposure to market risk. This way you are not relying on the returns of a single investment. Investment markets move up and down at different times. With a diversified portfolio of investments, returns from better performing investments can help offset those that underperform.

Holding a broadly diversified portfolio can also improve your performance potential and increase your chances of achieving market growth.

Getting your asset allocation right

Research confirms that how you allocate your assets to each asset class is more important to long-term performance than the individual stocks you choose.

Some investors prefer to leave the asset allocation decision up to a fund manager and invest in a diversified fund so they don’t have to worry about monitoring and rebalancing their portfolios.

Investors who want more control over their investments may decide to make up their own asset allocation by selecting individual asset class funds. If you decide to use this approach, you will need to be disciplined and monitor your investments on an ongoing basis and rebalance your investments in line with your asset allocation targets. Alternatively, you could ask your financial adviser to do this for you.

Your investment profile

Before choosing your asset allocation you will need to consider factors such as your:

• Short, medium and longer-term investment objectives.
• Investment timeframe.
• Attitude to risk and return.
• Current circumstances, limitations and future prospects.

The above factors will help you, or your adviser, identify your investment profile so you can determine the most suitable asset allocation for your needs.

Risk/return profiling is a tool used by professional and novice investors alike when determining investment profiles. It can be a detailed and individual process, so it is best completed under the guidance of a professional financial adviser.

Sometimes life doesn’t go to plan. So, it’s important to review your investment strategy if there are any major changes in your circumstances. If you need help, our professional financial advisers can determine the best investment strategy for your investment timeframe, objectives and personal circumstances.

Learn more about our Islamic investment products here.

This article uses a case study to demonstrate the strategy of holding in cash and waiting for share markets to fall (market opportunities/ volatility) before investing. It demonstrates the key benefits as well as consequences and urges clients to seek professional advice from a qualified financial planner.  

As any long-term share market investor knows, markets can go up and they can go down. While most people view a falling market as a bad thing, some investors see it as a buying opportunity. After all, it’s better to pay, say, $60 for a share after a market dip than $100 for the same share at the market peak. 

Of course, to be able to exploit these buying opportunities, the cash needs to be available. That means hoarding some extra cash while markets are happy in anticipation of a rainy day. It also means having a strategy around when to invest, how much to invest, how long to hold and what to invest in. There isn’t a single, off the shelf solution to this, but 58-year-old Adam provides an example of what the rainy day investor needs to think about.  

How much? 

Adam is a seasoned investor with a sizable self-managed super fund. He has weathered several market slumps over the years, and when markets are trading normally, with low volatility, he is happy to build up a cash reserve of up to 20% of his fund’s value to be used when the share market goes ‘on sale’. The cash comes from dividends and distributions, contributions and realised capital gains. 

When to invest? 

With no hard and fast rules, Adam decides that if the market falls by 10% he will invest 25% of his reserved cash. For each further fall of 10% he will invest a further 25%, so after a market fall of 40%, all his cash stash will be invested. This could occur in a short time period or evolve over many months of ups and downs. In some market corrections he may not use all of this cash. 

What to invest in? 

Adam has some favourite shares and if they fall significantly in value he will top up his holdings. However, he knows this involves more risk than buying the market, so most of his purchases will be of index funds.   

How long to hold? 

In volatile markets price movements can be sudden, dramatic, and in either direction. Adam’s strategy is to sell any shares that produce a gain of 20% or more during the recovery phase. He also uses stop-loss orders to provide some protection from further sharp falls. Adam also limits himself to buying quality assets, and is prepared to hold them long term if the recovery is a slow one. 

Adam knows his strategy isn’t perfect. If share prices don’t fall, he is left holding larger amounts of low-yielding cash than would normally be the case. If they fall a long way, he’ll miss out on buying at the bottom of the market. But Adam gains some peace of mind that if (or when) market corrections do occur, his strategy should provide some protection to his super portfolio and improve his long-term position. 

Seek advice 

This is just one example of a rainy day cash strategy. Everyone’s circumstances differ, and it is important to seek appropriate advice specific to your situation. 

At Hejaz Financial Services, we have an in-house investment team who manage your funds, setting the management of your wealth as our priority. Learn more about our Halal Managed Funds here.

6 ways to fight fear with facts

You wouldn’t be human if you didn’t fear loss.

Nobel Prize-winning psychologist Daniel Kahneman demonstrated this with his loss aversion theory, showing that people feel the pain of losing money more than they enjoy gains. Thus, investors’ natural instinct is to flee the market when it starts to plummet, just as greed prompts people to jump back in when stocks are skyrocketing. Both can have negative impacts.

But smart investing can overcome the power of emotion by focusing on relevant research, solid data and proven strategies. Here are six principles that can help fight the urge to make emotional decisions in times of market turmoil.

1. Market declines are part of investing.

Stocks have risen steadily for a decade, but history tells us that stock market declines are an inevitable part of investing. The good news is that corrections (defined as a 10% or more decline), bear markets (an extended 20% or more decline) and other challenging patches haven’t lasted forever.

The Standard & Poor’s 500 Composite Index has typically dipped at least 10% about once a year, and 20% or more about every four years, according to data from 1949 to 2018. While past results are not predictive of future results, each downturn has been followed by a recovery and a new market high.

2. Time in the market matters, not market timing.

No one can accurately predict short-term market moves, and investors who sit on the sidelines risk losing out on periods of meaningful price appreciation that follow downturns.

Every S&P 500 decline of 15% or more, from 1929 through 2018, has been followed by a recovery. The average return in the first year after each of these declines was nearly 55%.

Even missing out on just a few trading days can take a toll. A hypothetical investment of $1,000 in the S&P 500 made in 2009 would have grown to more than $2,700 by the end of 2018. But if an investor missed just the 10 best trading days during that period, he or she would have ended up with 38% less.

3. Emotional investing can be hazardous.

Kahneman won his Nobel Prize in 2002 for his work in behavioral economics, a field that investigates how individuals make financial decisions. A key finding of behavioral economists is that people often act irrationally when making such choices.

Emotional reactions to market events are perfectly normal. Investors should expect to feel nervous when markets decline, but it’s the actions taken during such periods that can mean the difference between investment success and shortfall.

One way to encourage rational investment decision-making is to understand the fundamentals of behavioral economics. Recognizing behaviors like anchoring, confirmation bias and availability bias may help investors identify potential mistakes before they make them.

4. Make a plan and stick to it.

Creating and adhering to a thoughtfully constructed investment plan is another way to avoid making short-sighted investment decisions — particularly when markets move lower. The plan should take into account a number of factors, including risk tolerance and short- and long-term goals.

One way to avoid futile attempts to time the market is with dollar cost averaging, where a fixed amount of money is invested at regular intervals, regardless of market ups and downs. This approach creates a strategy in which more shares are purchased at lower prices and fewer shares are purchased at higher prices. Over time investors pay less, on average, per share. Regular investing does not ensure a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Retirement plans, to which investors make automatic contributions with every paycheck, are a prime example of dollar cost averaging.

5. Diversification matters.

A diversified portfolio doesn’t guarantee profits or provide assurances that investments won’t decrease in value, but it does lower risk. By spreading investments across a variety of asset classes, investors can buffer the effects of volatility on their portfolios. Overall returns won’t reach the highest highs of any single investment — but they won’t hit the lowest lows either.

For investors who want to avoid some of the stress of downturns, diversification can help lower volatility.

6. The market tends to reward long-term investors.

Is it reasonable to expect 30% returns every year? Of course not. And if stocks have moved lower in recent weeks, you shouldn’t expect that to be the start of a long-term trend, either. Behavioral economics tells us recent events carry an outsized influence on our perceptions and decisions.

It’s always important to maintain a long-term perspective, but especially when markets are declining. Although stocks rise and fall in the short term, they’ve tended to reward investors over longer periods of time. Even including downturns, the S&P 500’s average annual return over all 10-year periods from 1937 to 2018 was 10.43%.

It’s natural for emotions to bubble up during periods of volatility. Those investors who can tune out the news and focus on their long-term goals are better positioned to plot out a wise investment strategy.

Avoiding investment in highly leveraged ASX-listed companies can lead to stronger returns, according to a study by environmental, social and governance (ESG) and Islamic fund manager Hejaz Financial Services.

Their recent analysis showed that over one year, the total return (weighted average) for companies with a debt/market capitalisation ratio less than 30% was 14.92%, which was three times that of companies with ratios of 30% or higher.

Over a period of three years, companies with relatively low debt/market cap ratios returned 25.35% (weighted average), compared to 8.89% for the rest of the market.

Over five years, low-debt companies more than doubled the investment return (on weighted average) of more highly geared stocks.

The sectors most likely to include highly-leveraged companies were financials, real estate and utilities, with IT and healthcare companies carrying debt/market cap ratios of less than 30%.

Hakan Ozyon, Hejaz’s senior portfolio manager and chief executive, said that approach helped deliver consistent returns for clients and help outperform ‘mainstream’ ESG funds.

“By taking a values-based approach to investing which, for Hejaz, involves excluding highly leveraged companies, we’ve delivered a gross return of 9.37% per annum since inception,” Ozyon said.

“With interest rates reaching record lows and debt being cheaper than ever, we’ve seen a sharp rise in management’s comfort with taking on greater levels of debt.”

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