By Edward Liamzon
Yaser Abushaban, Executive Director of Asset Management at Emirates Investment Bank, examines the risks for entrepreneurs when investing their wealth
Making an investment is like deciding to go on a road trip- you can choose your destination but often cannot choose which road will get you there.
The short scenic route with few twists and turns does not always work; sometimes you have to take the long and winding road with more risk along the way. For most, making the safer investment, or taking the less winding road, is the preferred option.
The entrepreneur forges his own path, however, taking on a great deal of risk during his journey towards wealth creation.
As an entrepreneur you have much more flexibility in choosing your own path, but more choices also imply more chances to make mistakes, hence the greater risk associated with entrepreneurship.
A typical entrepreneur is a self-starter who has expertise in one particular field and will, therefore, concentrate his wealth into the business he’s building – it’s what he knows.
The savvy entrepreneur builds wealth by taking chances but also knows that there are few ‘sure things’ in life.
Once successful at accumulating wealth, the smart entrepreneur recognises that, while his businesses remains the main sources of his wealth, prudence dictates that he not reinvest all of his wealth back into his business.
Going from wealth creation to wealth preservation requires a more diversified approach to investing by the savvy entrepreneur, where he purposefully reinvests some of his wealth in areas not related to his business.
Those building businesses typically engender that entrepreneurial spirit often synonymous with risk.
We see this spirit all over in the UAE, a country populated with entrepreneurs.
They build their wealth by taking chances, and when the right times comes these entrepreneurs should seek professional advice on how to manage and preserve their wealth, and eventually transfer it to their children.
Risk and the entrepreneur
Wealth is created in the real economy, not in the financial markets, by entrepreneurs who build real businesses and find ways to add value to people's lives.
The UAE has a vibrant entrepreneurship landscape with huge potential for SMEs to participate in the growth of the nation’s economy.
We believe that, once these entrepreneurs have accumulated some wealth, they are well advised to broaden their horizons towards other financial assets and not rely solely on their chosen business field.
What we often see however is that entrepreneurs are quite comfortable at concentrating on their own businesses or business area because they believe that they have a deep understanding of the business and risks involved better than outsiders.
Their level of familiarity and comfort with their businesses could lead to understating the risks involved with concentrating their wealth into a single business or business area.
That is a bias that we try to protect investors against by urging them to diversify their accumulated wealth across asset classes.
By using risk as a starting point to the investment process, an investor can allocate this risk budget among the best available opportunities.
By doing so the investor can avoid many pitfalls of investing, or at the very least understand where the pitfalls come from, if they do occur.
This process of identifying risk appetite and tailoring assets accordingly results in a diversified portfolio of investments that minimises the impact of negative shocks on the value of a portfolio.
Risk and the markets
We have seen major swings in the willingness of high net worth individuals to take financial risks over the past five years.
From the heydays of 2007 and early 2008 to post crisis downfall, it became apparent that risk-taking behaviour is contagious.
This herd-like mentality dominated on both side of the risk taking spectrum – low and high.
When risk-appetite was high pre-crisis, taking risk was made easier by seeing many others around you engaging is risky behaviour – as if an activity becomes less risky because more people engage in it.
You and I know this does not make sense financially, however from a psychological standpoint, engaging in risky behaviour tends to be more acceptable when it is more common.
On the other hand, those who got burned during the crisis sought refuge in safe assets and shunned risk - risk-taking was decried because others were less inclined.
An objective non-emotional assessment of risk would have led a smart investor to take less risk when everyone else was rather cavalier, and to take more risk when the majority were rather cautious.
What we have seen around the world, and in Dubai specifically, demonstrates this mentality.
In Dubai we saw how disregarding risk led to a speculative property bubble followed by economic and stock market recessions; a time when erstwhile cavalier investors shunned equity and real estate investments for the safety of cash deposited in banks, eventually missing the rebound in the equity and real estate markets that occurred in 2012 and 2013.
Innovation and diversification
Entrepreneurs understand how to innovate, create and build. They also understand taking risks.
We intimately understand the role which risk plays in constructing an investment portfolio and that predicting the future is much less of a science and much more of an art.
The worlds of economics and politics are intertwined, and markets are the collective sum of investors’ action - too big to predict with any level of consistent accuracy.
Hence to manage the markets’ volatility and indeed our own human fallibility at predicting the future, investors need to adopt a diversified investment approach.
Yaser Abushaban is the executive director for asset management at Emirates Investment Bank.