With the UAE stock markets in turmoil it is vital investors re-examine their portfolios.

This week the Abu Dhabi and Dubai stock exchanges suffered their worst trading sessions for almost seven months while Dh65 billion has been wiped off their value in August alone.

Now a number of financial advisors are urging investors to diversify their portfolios more than ever in a bid to ride out these dips rather than face massive losses.

Those in the United States, for instance, who invested all their money in property are now reeling as a result of the credit crunch.

Even hedge funds, which are specifically designed to minimise investor risk, have attracted criticism and piled up some big losses.

Imad Ghandour, Executive Director at Gulf Capital cites another incident a few years before that should serve as a warning as to why people should not put all their money in to one asset.

"The US stock market crash of 2005 should be a good lesson about why to diversify because if people had all their money in private equity they would have lost everything," he says.

"People get blinded by quick one-year returns but forget about the long term then when something like this crash happens, everything is gone. They should also keep some cash too in case of emergencies or to act as a safety net in case some stocks fall or they can't access their money quickly."

But diversifying is no easy task. There are many questions investors should ask before parting with their money: whether they want it in bonds, equity or real estate, or even just choosing the market in which to invest. Although there are plenty of options on offer in the UAE and other GCC countries, there is no reason why residents of the Emirates should not look further – whether to their home countries or somewhere completely new.

"We are constantly amazed by how little time people give to considering their investments and diversifying," says Nigel Watson, Sales Director for insurance firm Nexus.

"In this part of the world with people seeing such spectacular returns from the property market there is a temptation to dive in and put all their money in one investment, but we always tell customers that diversity is an absolute must."

For those new to the game, choosing which investments to gamble with can seem like a minefield. Experts recommend seeking professional advice first. Fund managers also send out automated monthly or quarterly results to investors, which is much easier than individuals scanning the markets themselves.

For those without access to alternative investments, some recommend splitting money between equities and bonds, while mutual funds offer diversity in one market.

Rami Bazzi, Principal of private equity at Injazat Capital says it is also important to constantly review these as needs change. "Risk varies within an asset class as much as between them, so it makes sense to diversify across industries and sectors.

"Every investor also needs to consider their needs and how these change during their life cycle, in the same way their income will vary, therefore the level of risk they can tolerate may change accordingly," he says.

Financial advisors can take people through this and help them consider their options. Although individuals can do it themselves, keeping track of different assets in different markets is no easy feat.

Nexus' Watson says: "Technology in the financial services industry has moved on a lot over the past two to three years so if people attempt to do everything themselves they risk not looking at all the options." Planning ahead is also vital but sometimes a more radical overhaul of investments is needed. Michael Samaha, a Managing Director of Morgan Stanley Investment Management, believes that portfolio diversification is important to limit the specific risk of any one asset and because timing market cycles is difficult. "Most investment themes usually take three to five years to play out," he says.

In the current economic climate where investments can be unpredictable, having guaranteed returns is a welcome relief for some. While fixed income investments, such as cash deposits or bonds pay out pre-agreed profits, the World Gold Council (WGC) is encouraging investment in the precious metal as a good alternative. Gold is a hedge against inflation, which is particularly significant in this part of the world and is inversely proportional to the dollar therefore has seen significant rises over the past couple of years, says the authority. Rozanna Wozniak, investment research manager at the WGC says: "When reducing risk, gold comes into its own and this has gained more attention with investors who thought that taking on risk was okay, but the credit crisis has hit home and now they realise they need something in their portfolio that reduces this risk.

"Gold has a lack of correlation with other asset classes, therefore if they're doing badly it will not get dragged along and acts as an insurance policy in a portfolio."

So whether investing in equities, real estate or bonds, it can be difficult to predict where the peaks will be, which underlines the importance of diversifying.

It can also protect a person from losing everything, says Watson. "Any investment involves risk but diversifying is about insulating investments from a substantial loss," he says.

"And because investments can go up and down, it also means people can sleep better at night."



Emerging markets

Although there are dozens of markets investors can choose from, professionals agree that there are some attractive prospects especially in Asia – particularly China and India – as well as Latin America.

But Rami Bazzi from Injazat Capital says that while emerging markets present opportunities because they are still in growth, this could in itself pose risks as they are not as established as others. However, that should not necessarily put people off looking at these areas.

"I wouldn't recommend people put all their money in the UAE or in any one region or asset class for that matter. For small investors a broadly diversified portfolio giving exposure to many regions and asset classes may be the best way to go," says Samaha from Morgan Stanley.