Introduction to Foundations
Have you ever tried to build something, only to have it collapse because the foundations were not strong enough? Whether you're talking about a physical structure like a house or a metaphorical one like a career or a relationship, the importance of building on solid foundations cannot be overstated.
The following educational content series is meant to support you in building your wealth management journey on the right foundations—we’d like to set you up for success and enable you to make the right financial decisions with a cool head. Let's start with this first piece; trading vs investing.
Trading vs Investing
What comes to mind when you hear the words 'stocks' or 'equities'? Many people visualize complex charts and a scrolling bar at the bottom of a monitor showing green and red values. However, the tangible reality is far from this perception; owning a stock, also known as equity or shares, means you have partial ownership in a real, functioning company - its assets, profitability, future earnings, and its team of professionals.
We have been consistently trained by the media and culture to view the landscape of investing from a viewpoint of trading. So let's break down the difference between trading and real investing.
Imagine an investor, Jane Doe, who purchases a $1,000,000 apartment in Downtown Dubai. Jane is anticipating a surge in her property’s value to $1,200,000 within a year, which she plans to eventually sell for a profit while also collecting rental income in the meantime. Jane's strategy is a form of trading: buying low to sell high. She views property prices every few days, with falling prices upsetting her and rising prices edging her closer to her goal.
Now, consider another investor, Jana Mokhtar, who also has $1,000,000. Jana wishes to preserve the long-term value of her funds while generating passive income. She buys the same Downtown Dubai apartment for its full price. For Jana, property is a good hedge against inflation, and it also provides an annual rental income of $70,000, a passive income stream she can use or reinvest. Regardless of whether property prices fall or rise, Jana remains unfazed as her investment continues to meet her objectives.
Familiar to many in the UAE, brokers keep calling and asking whether she wants to sell, which she sees as nothing but a nuisance. Markets fall, and some brokers go as far as trying to scare her by quoting low prices urging her to sell before it goes down further. Markets rise, and the same brokers explain to her that it's a good time to sell and take her “winnings”. Jana is unfazed with either and insists to stop receiving calls as long as she is achieving her objectives.
This scenario represents true investing, the very reason why the wealth management industry should exist: to assist individuals in meeting their financial goals in the most efficient way possible.
Think of company ownership akin to property ownership. Imagine having a property management team taking care of your properties and their rentals—this, too, is a form of equity. Owning shares in companies should be viewed similarly—you have an entire organization striving to add value and generate income. The income can be reinvested or used to cover expenses.
In our foundational content, we will delve deeper into real investing and steer clear of trading. Trading isn't a core component of long-term investing, and it often carries risks higher than what most people can bear. When we discuss cash, bonds, properties, and equities, it will always be from the standpoint of owning assets for the preservation of long-term wealth and generation of natural returns.