You’ll hear Financial Advisors going on about diversification when it comes to your investments.
Well, they’re right.
Here’s a real-life case of a client who did most things right with their savings and investments. They lived well within their means, planned for their future, grew their savings, and invested carefully over the years.
And yet, this one mistake set them back massively.
The Goal
When I met Sajid and Nisreen back in 2008, they were both high-income executives in high-pressure jobs. They had two little girls, five and six years old.
Sajid’s time was hardly his own: He had a regional management role with an infrastructure company and traveled for work five days a week.
Nisreen worked in finance and was quickly climbing the ranks. She had her hands full with work, the kids and managed the household.
The goal was for them to be able to give the girls a quality education wherever in the world they chose to go, and for Sajid and Nisreen to have a comfortable savings and investment portfolio so that they could eventually return to and retire back home in Pakistan.
The Action Plan
Both Sajid and Nisreen were laser-focused on making that comfortable financial bed for the family. Their incomes grew significantly over the years, but they lived well within their means.
They saved meticulously and invested in a few different asset classes. But their most substantial investments were in the property market in Dubai, and an even more extensive property portfolio in Pakistan.
But then things took a turn south.
The Twist
The UAE property purchases they made happened to be at a time when the property market was extremely inflated, so when the market crashed, their assets depreciated by a solid 30-40% – including the value of their home in Dubai.
Their rental income on the various properties in the UAE barely covered mortgage in some cases, and in other cases, they were paying out of pocket to make up mortgage payments. At this point, they still had about 10-15 years left on these mortgages.
Simultaneously, the Pakistani rupee began its decline. So, although those property purchases are lucrative investments in Pakistan, liquidating that portfolio to support their investments in Dubai meant that they would take a huge hit because of currency exchange: a drop in over 50% of its value!
The silver lining there, however, is that they do plan to go back and retire in Pakistan eventually, and the portfolio will still prove to be a valuable asset then assuming that inflation does not consume the country. They will likely end up selling most of that property and investing in a home for themselves.
Luckily for Sajid and Nisreen, they had invested some of their money in a few other asset classes like equity funds, mutual funds, and well-structured Life Insurance policies.
Their other investments worked out great, and they have seen some significant returns from those investments over the years. They also had Term Life Insurance policies, which allowed them to save a lot of money into ETFs, tracking the S&P 500 index.
The Outcome
Here’s where we are now: Sajid is now 53 years old, and Nisreen in her mid-40s. One of their kids is ready to go off to university next year, and their younger daughter will follow in a couple of years.
They’re financially secure, and they’ve saved up what they wanted to for the kids’ education. But looking back, I can see how they could have been miles ahead of where they are now.
The Big Takeaway
The mistake they made was that they invested too much into one asset class: property. And that particular investment didn’t pan out so well for them.
Granted, they spread it across two markets, but then the unfavorable currency exchange movement left them at a disadvantage there. Consider also the fact that as an asset class property is not the easiest to liquidate. Disposing your property could end up taking you months and sometimes (like in my case) years.
It would have served them well to spread their investments out more evenly across the mutual funds, ETFs, and other asset classes, rather than put most of their eggs in one or two baskets.
Listening to your ‘gut’ is a big part of making investment decisions for many people. But experience and retrospection can hardly be discounted.
Take out some time and go over your investment portfolio. If things are looking a little too clustered, no matter how well it’s going for you, consider spreading the risk out a little.
Like Roosevelt said, ‘Learn from the mistakes of others. You can’t live long enough to make them all yourself.’
