How to avoid fear, ignorance and greed to build long-term wealth

A new investment guide from SimplyFI.org offers a simple strategy for novice investors that can be learnt in a couple of hours

Illustration by Mathew Kurian 

Many people are put off from investing for retirement because they find the whole thing too complex.

While some fall into the hands of sharp-eyed financial salesmen, who lock their money away in high-charging bonds or savings plan that eat their wealth, others try to be too clever, and come unstuck trying to make fast money from high-risk stocks or hyped-up assets such as Bitcoin.

Investing can seem particularly complicated, at times of extreme volatility like today, when share prices could go anywhere.

Yet according to SimplyFI, a non-profit community of personal finance and investing enthusiasts who help each other to achieve financial independence, investing doesn't have to be complex at all.

You can master the basics in just a couple of hours, and start building your long-term wealth in a safe and secure way. They have even produced a guide, telling you how to do it. Even better, that guide, published this month, is free.

Called the Index Investing & Financial Independence for Expats, Getting Started Guide, it can be downloaded online from SimplyFI.org or on the group's Facebook page. The guide's main author is Elie Irani, 45, from Lebanon, who has lived in Dubai since 2006 and says too many resident investors get led astray. Mr Irani, who works for a cybersecurity company and became a board member of SimplyFI in April, says the biggest threats to building wealth are your own fear, greed and ignorance.

Fear persuades many people to shun the stock market or panic and sell up in a crash, for fear of making short-term losses, says Mr Irani. Greed leads them into get-rich-quick schemes, where they lose most or all of their money.Ignorance makes easy prey for financial salesmen who earn massive commission by selling inappropriate products that combine sky-high charges with lousy performance. Many lose hundreds of thousands of dollars as a result and retirements are ruined.

“Our group operates under the principle that successful investing can be accomplished by anyone with a small amount of effort,” says Mr Irani.

“The guide is designed to be read in a couple of hours or less. It helps beginners make sense of terminology and core concepts, to help them invest towards their own financial independence.”

Founded by former UAE resident Sebastien Aguilar, who now lives in Poland, and Dubai resident Jen Lincoln, SimplyFI's aim is to raise financial awareness in the UAE and promote the advantages of simple, passive investing.

The group holds regular talks and presentations, both at events and online, and has more than 10,000 followers on Facebook.

It believes the best way to generate wealth is to put your money in low-cost exchange traded funds (ETFs), and leave it there for the long term. These ‘passive’ investment funds dispense with expensive fund managers, and simply track their chosen indices up and down, wherever they go.

This means no expensive fund management fees, so you get to keep more of the capital growth and dividend income yourself.

Fund managers are lamentably bad at beating the stock market. The Spiva scorecard of long-term fund performance shows that in the longer run, more than eight out of 10 underperform.

By their nature, index funds never do.

SimplyFI members regularly describe themselves as “Bogleheads”, part of a movement of investors who follow the basic principles set out by Jack Bogle, who championed low-cost, simple investing philosophies.

In 1974, Mr Bogle founded Vanguard, now best known as a provider of low-cost ETFs, which managed almost $5 trillion (Dh18.36tn) in assets when he died last year, aged 89.

He noticed, earlier and more clearly than most, how the financial industry rips off its customers, saying: “The mutual fund industry has been built, in a sense, on witchcraft".

However, he believed there was a way out: “When there are multiple solutions to a problem, choose the simplest one.”

As one of the world’s biggest ETF providers, Vanguard has a financial incentive to promote the Bogleheads philosophy. It is hard to complain given that its funds are so cheap.

FTSE All-World UCITS ETF gives you a spread of around 3000 global stocks for a total charge of just 0.22 per cent a year. Vanguard S&P 500 ETF charges 0.03 per cent. That is cheap, even by ETF standards.

By comparison, actively managed funds charge between 0.75 per cent and 1.5 per cent a year. That money comes straight out of your returns. Some funds still have initial set-up charges of up to 5 per cent, too.

The SimplyFI guide provides an actionable step-by-step playbook for index investing and managing your portfolio, building a spread of funds, protecting your wealth with insurance, and managing withdrawals in retirement.

Personal finance and investment writer Andrew Hallam, author of Millionaire Teacher and Millionaire Expat, says SimplyFI is sharing rules of wealth that people should have learnt at school. "Investing is a long-term endeavour. It rewards people who add money whenever they have it, and punishes those who seek perfect entry and exit points," he says.

Mr Hallam says the best investors are like the fictional character Rip Van Winkle because “they set an investment course, go to sleep and wake up 20 years later".

Some residents still want independent financial advice, especially if they face complex tax planning issues. A growing number of Dubai-based advisers offer this, such as AES International, while minimising fund charges by only recommending ETFs.

Alternatively, robo-adviser Sarwa offers a choice of model portfolios that use ETFs to invest in globally diversified portfolio of stocks, bonds and other asset classes, tailored to your risk tolerance.

Co-founder and chief executive Mark Chahwan says his site’s investment principles chime with the Bogleheads’ philosophy.

He says once you have built six months of emergency cash, you should start investing as soon as you can. “That way you get the full benefit of compounding dividends and growth.”

Next, diversify, he says: “We recommend a combination of fast-growing small companies in the US, Europe, Japan and emerging markets, combined with government and corporate bonds to provide steady income, low volatility and low correlation with stocks.”

You also need to rebalance your portfolio over time, to avoid having too much money in your most successful assets, he says.

Lower your costs, Mr Chahwan adds: “The DIY community saves on advisory fees. They only pay for the ETF fees and a brokerage platform to trade on.”

Finally, control your emotions. "Good investors are patient and detach their emotions from market movements," Mr Chahwan says.

Sounds simple? Well it is. As Mr Bogle said: “Owning the stock market over the long term is a winner's game, but attempting to beat the market is a loser's game.”