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Home / Opinion / Lessons from Dubai. But have the investors learnt?

The long walk to my departure gate at the Dubai International Airport was overshadowed by the efficiency of check-in procedures.

The glittering rows of shops in the airport terminal ensured that I did not miss comfortable chairs to sleep in, especially since I did not have lounge access.

Stretched out, I reminisced over the interactions over the past few days as I met clients, prospective clients and just friends to get a better understanding of the way Dubai residents behaved with respect to their money.

Three learnings sprang to mind. The first was the inexorable inertia to change one’s financial adviser, and this even though you are not terribly satisfied.

The second, was the strong “recency" bias that comes into play when evaluating whether it is the right time to invest or disinvest. And finally, when we seek safety as investors and shun the potential of growth by staying away from risk assets, we tend to ignore both taxation and inflation when it comes to our investments.

One of the prospective clients I met during my stay there strongly felt that there was indeed a case for a professional, personalized investment advisory service. He told me that he had invested through a large international insurance and investment company over the last 10 years. His complaint was that, even after so long, he was just about breaking even. But the inertia of changing the investment adviser was so strong that he was continuing to put in his monthly investments through the same firm.

Further, he was thrilled to bits that we offered to review his existing investments and keep them in mind while providing financial advice in the future. It was apparent that investment intermediaries in Dubai, who are compensated for new assets, were less concerned with existing investments that their clients had, unless they were willing to encash those and hand over the proceeds to the intermediary.

I had noticed that Dubai traffic was picking up once again—though nowhere close to the snarls that prevailed in 2007, this was when two-thirds of the world’s cranes were furiously busy constructing here. This could be because the efficient Metro launched in 2009, may have taken on some of the load.

A friend of mine was convincing me that investing in real estate was a very good bet now. Certain areas in downtown Dubai had risen by 35% in the past year, and “are expected to increase by another 20-22% in this year". After all, Expo 2020 was round the corner, he said. Seemed like a scheme with guaranteed returns!

In my next meeting, the conversation again veered towards real estate, and I narrated this incident. The response was: “Good luck".

The client explained further that the company he worked for had a large real estate portfolio that they were trying to sell. Every real estate broker he met tried to sell him some “upcoming" property.

And when he insisted that he wanted to sell part of his holdings, they asked for details and promised to get back. So far, he was still waiting for any one of them to fulfill their promise.

Clearly, the “recency" bias was playing a role in both these cases. When things start looking good, and our eyes are fixed skywards, we tend to forget that we are walking up a mountain; and the higher we get, the steeper is the cliff and greater the risks. The same is true when everything around us is gloomy and grey.

When I met my next prospect, who did almost all his investments in fixed deposits in India, I started by telling him that he was fortunate to be investing in a country (India) which had higher inflation than where he resided; since he could benefit from higher interest rates prevailing in India. However, the truth of the matter was that inflation impacting him was much higher.

If interest on fixed deposits is 9%, and your tax rate is 30%, the real return on the deposit works out to 6.3% a year. Post-tax returns need to be higher than inflation to ensure that you are positive in real terms at the end of the year.

If prevailing inflation is higher than the returns, and likely to remain that way, you are ensuring that you are worse off at the end of the year in 100% of the cases by investing in that very product.

Over the long run, equities have shown that they are the only asset class that is certain to beat inflation. Investors are surprised to know that Indian equity indices have returned 20% a year on compounded annual growth rate basis in the past five years because they are focused only on the past three years.

Though in the short run, equities may be volatile or even give you negative returns; but unlike fixed deposits and other such instruments, you are leaving yourself with a chance to beat inflation post-tax.

Investors all over the world will benefit if they take time in selecting their financial adviser. One should also ensure that the asset allocation mantra is followed.

And that way, they ensure that recent returns do not sway them and they participate in the potential upside of each and every asset class.

Lovaii Navlakhi is founder and chief executive officer, International Money Matters Pvt. Ltd.

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