Which assets could offer investors higher returns in the current market?

Susan P, a public relations professional in Dubai who wishes to remain anonymous, wants to invest in assets that offer high returns as she plans to retire in about a decade.

“Considering that my employability will reduce drastically in my mid-50s, I need to be in a position to retire safely with enough to fund my life for at least 30 years,” says the Indian resident, who is in her 40s.

“I have a non-resident Indian bank account with 2.7 per cent annual returns, a life insurance policy that already matured and a couple of accounts in India that my father manages on my behalf. I don’t have any real estate assets yet.”

She wants to grow her savings in compound interest plans that offer high returns and aims to have at least 30 times her annual expenses in savings and investments by the time she retires.

Americans believe they will need $1.27 million to retire comfortably, according to a survey of 2,740 adults between February and March by financial services company Northwestern Mutual. That number increased from $1.25 million last year.

Meanwhile, the average amount that US adults have saved for retirement modestly increased by 3 per cent to $89,300 from $86,869 in 2022, the survey revealed.

While it is often said that it is never too early or too late to start retirement planning, the best way is to start planning at least 15 to 20 years in advance, suggests Vijay Valecha, chief investment officer at Century Financial. This assumes that by this time, the person is already settled with their home and savings for emergencies, he says.

“The core theme of retirement planning considers future expenses, liabilities and life expectancy. This should not be combined with an individual’s medical and life insurance plans,” he says.

Meanwhile, Rohit Hanspal, 37, an Indian resident in Dubai, says he chose to stay conservative and refrained from high-risk investments during the 2020 market high.

However, following a drastic change in market conditions and an enhanced risk appetite, he rebalanced his portfolio to include debt (bonds, fixed deposits and funds that invest in debt instruments) and equities.

“In recent times, due to higher Fed rates and a dip in the equity markets, the current markets offer a good chance to investors with varying risk appetite to rebalance their portfolio into either debt-based, fixed-income instruments with good returns coupled with less risk, or to take some risk and start investing in equity in a systematic manner and eye for higher returns,” he says.

We asked market experts to round up assets that could offer higher returns in the current market, the due diligence investors need to take and how to assess their risk appetite.

What assets to consider

Technology stocks offered the highest returns in the first half of this year, yet expect a rotation from growth to value stocks in the second half, says Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Persistent central bank tightening, sticky inflation, potential Chinese reopening and an eventual slowdown in western economies hint that capital could flow to stocks that could better weather the shock, she says.

“Commodities or commodity stocks look interesting at the current discounted levels. Sovereign bonds, especially [the] longer end of the curve [10 years-plus], will be interesting.”

“In FX [foreign currency], the euro, Swiss franc and Canadian dollar could outperform, while the Australian dollar and British pound could stall.”

Fawad Razaqzada, market analyst at City Index and Forex.com, believes government bond yields will remain high as investors demand a higher rate of return for the opportunity cost of holding government debt amid climbing interest rates.

“With yields providing attractive rates of return, many people are discouraged from investments that pay low or zero yields. So, things like gold and silver might not find too much love, compared to some dividend-paying stocks,” he says.

Muhammad Rasoul, chief executive of retail investment platform amana, would consider dividend-yielding stocks for value and predictability, and he expects the technology sector to generate higher returns.

Technology has been on a run over the past six to 12 months, so look for good entry points on market sell-offs in technology, he suggests. If your time horizon is two to five years, this sector could outperform the broader market.

The availability of asset classes offering high returns in the current market depends on your risk tolerance and investment timeline. It is generally recommended for a person to have a diversified portfolio across various asset classes and geographic regions, according to Alex Salter, financial planner at the Fry Group.

“In addition to conventional methods, such as diversification, there are alternative options like venture capital trusts or enterprise investment schemes that can be useful for investors with UK tax exposure,” he recommends.

“They have the potential to provide attractive returns through investment in small, unlisted UK businesses and offer significant UK tax relief. However, these options come with significant risks and are typically suitable for long-term investors who don’t require immediate liquidity.”

For venture capital trusts or enterprise investment schemes, several providers offer subscriptions to these initiatives.

It is important to examine the types of small businesses the schemes invest in and to determine if they align with your investment philosophies, Mr Salter warns. Also assess the provider’s track record and evaluate the returns they have generated over specific periods, he says.

Bilal Abou-Diab, co-founder and chief executive of wealth management platform Vault, says while investing in equities, it is important to stay diversified beyond specific sectors.

Some critical sectors for investors to currently take exposure in include artificial intelligence, robotics, health technology and sustainable energy, he says.

If you are a lower-risk investor, then you might consider investing in a combination of equities and bonds, says Laith Khalaf, head of investment analysis at AJ Bell.

“Equities will tend to have higher returns in the long term but they often move in the opposite direction to bonds, so if you hold both in a portfolio that makes for a smoother journey,” he says.

“The dramatic rise in interest rates means that bonds now offer a reasonable rate of return following a yield-starved era of loose monetary policy, and carry less valuation risk.

“For higher risk investors, a more equity-orientated portfolio is probably in order. It’s impossible to say with any certainty where the highest returns might come from, so it’s a good idea to spread your eggs between different regions and industries.

“Those who have more adventurous blood might also consider investing in smaller companies and emerging markets, which tend to be more volatile but also offer the potential for higher long-run returns.”

Meanwhile, risk-averse savers or those who might need to draw on their money in the short term should consider cash, he reckons.

There are plenty of decent interest rates on offer, although over the long run, cash is vulnerable to inflation risk, Mr Khalaf says.

Mr Valecha says investors looking for high returns can also consider retirement income funds such as the T. Rowe Price Dividend Growth Fund and Vanguard Wellington Fund, which have offered a 10-year average annual return of more than 9 per cent.

These funds deploy most of their portfolio holdings in equities, allocating some to bonds and cash holdings. They also diversify their equity holding base to avoid country and sector concentration risk, he points out.

Mr Valecha also cites pension policy plans in emerging markets with high interest rates that offer an average range of more than 10 per cent annually. This is subject to their slabs, thresholds and penalty conditions for termination before the plan duration.

Another way to secure high returns is by investing in index exchange-traded funds.

“Major US benchmark ETFs SPY and QQQ have offered more than 200 per cent cumulative returns over the last 10-year duration. This translates to an annual equivalent holding return of 13 per cent,” he says.

“With the QQQ ETF, which tracks the performance of US tech stocks, the annual equivalent holding returns are even higher at 18 per cent. Such index funds are instrumental in weathering short-term market panic and investing for longer-term goals.”

Investors could also look at non-traditional assets such as real estate investment trusts and private equity. While the returns can surpass those gained from traditional investments, there is also a significant risk factor, says href="https://www.century.ae/en/vijay-valecha/" style="color: blue;">Vijay Valecha, chief investment officer, Century Financial<

How to do due diligence

When considering investing, start by conducting research into the organisation you are looking to invest with, according to Amen Ghebre, head of wealth advisory services at digital wealth management platform Sarwa.

Review their investment philosophy, their approach to managing your money and the tools and resources they provide.

Does it align with your needs? What continuing support or advice will they offer you? Will they manage the investment for you or will you be expected to add input? Have a conversation with the company or an adviser, he recommends.

“Investing is a long-term partnership between yourself and the company,” Mr Ghebre says.

“Do you see yourself working with them for many years to come? Review the investment solutions they offer.

“What are the fees and are there penalties for exiting? Lastly, inquire about the consumer protection measures in place. Is the company licensed to provide advice? If so, by whom are they regulated?”

Working with a regulated entity provides peace of mind to investors as there are checks and balances in place to protect them.

Investors must ensure they fully understand the asset class or instrument they are about to invest in, says Mr Salter from the Fry Group.

It is important to look out for any misleading adverts promoting high returns without any detailed information on how they are achieved in difficult market conditions, he warns.

“Before investing, you need to understand the asset, its historical performance, the factors that influence its price and future growth prospects,” according to Mr Khalaf.

“Assess the potential risk associated with each investment, for instance market risk, sector risk for equities, interest rate risk for bonds and liquidity risk for property.”

How to set your risk strategy

Risk appetite is subjective and unique to the individual. Investors have various goals, financial circumstances, investment timelines and investment experience, which will result in various risk appetites, according to Sarwa’s Mr Ghebre.

Always keep in mind that all investing involves risk, he warns.

Your risk appetite should be determined by your age, the time that you need to utilise the funds in your investment portfolio and an honest conversation on what type of drawdown you can withstand without liquidating your investment account, says Mr Rasoul from amana.

It is important to undergo a proper risk assessment to determine a suitable risk strategy when investing.

“When investing in equities, one should approach it with an understanding of tail-side risk and volatility risk,” says Mr Abou-Diab from Vault.

Tail-side risk is the chance of an unexpected, catastrophic loss in value that could drastically reduce the value of an asset. The best way to mitigate tail-side risk is through diversification across different asset classes and sectors, he says.

Volatility risk is the routine fluctuations in the value of an asset. Investors need to develop a tolerance for volatility risk because it is inherent to investing, especially when investing in equities, he adds.