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A sea of small fish

Lebanon needs financial products for smaller investors

by Camille Moussa

Whether it is mutual funds, hedge funds, private equity funds, managed accounts, individual securities or any other alternative investment, one can safely assume that the needs of high net worth individuals are catered for by both local and international banks and financial institutions. There is a plethora of financial products and services to address the needs of these individuals, and for banks and financial institutions, it makes empirical sense to target them since they possess the largest sums of money.

But what about the individual with a couple thousand dollars who does not even qualify to buy a mutual fund at a bank because the required minimum investment is anywhere from $5,000 to $100,000? How about the individual who has zero cash saved up, but would like to start an investment plan on an ongoing basis? What saving or investment options are they left with?

Common challenges

There are two factors that impair the ability of the average person to participate in the capital markets locally. The first is a lack of education about the financial markets, and the second is the lack of products designed to meet the needs of that person. This leaves the common individual with three choices: deposit money in a bank where it waits to earn an interest rate that inflation will slowly but surely eat away at; open a leveraged trading account with the hopes of multiplying that small capital, only to see it evaporate into thin air; or buy some insurance and savings products that promise something, but only if something else happens, while never being sure of what these ‘somethings’ even are.

Today, banks and financial institutions are aggressively pursuing the creation of investment funds as they are aware of the importance of presenting their clients with an array of ways to save and invest. Since banks impose a minimum amount to be invested, certain questions arise: What happens to the person that does not have that required minimum? What if I am a person with no capital that can be invested, yet I am able to allocate a couple of hundred dollars a month? What are my choices?

At this stage, the only alternative is some sort of an insurance savings product that allows me to contribute a small amount of money on a regular basis. Not that there is anything wrong with these products, but shouldn’t there be another alternative for investors in deciding how to save? In the US, investors can buy mutual funds with as little as $100 per month — far lower than in Lebanon. This gives them the discipline to save money on a regular basis. It provides them with diversification, risk reduction and regulatory protection.

Moreover, such ‘dollar cost averaging’ allows people to invest at all levels of the markets, forces them to contribute to a mutual fund on an ongoing basis and reduces the risks of both timing the markets and of investing lump sums. It shapes the individual to adopt the mentality of a long term investor, not a short term trader, as it does not make any sense to think of dollar cost averaging for the short term. This, in turn, will hopefully reduce the gambling attitude towards the markets. People will know what they are buying as funds are regulated and transparent, and it will allow them to potentially earn higher returns than with bank deposits and insurance products.

Dollar cost averaging is vital, but more important is its implementation through mutual funds. It is an efficient method that allows people to grow their small capital into a decent amount in the future. The higher potential returns from investing in the capital markets are definitely more attractive than bank deposits or insurance products. The average rate of return on deposits is about 3–3.5 percent, compared to the historical return of roughly about 9–10 percent for equity capital markets. Thus a $250 monthly contribution will yield about $55,000 in 15 years, compared to an approximate $100,000 return generated from the capital markets.

This method of investing is ideal for those who plan to save for their retirement and their children’s education. The capital markets should not only be accessible to larger investors; smaller investors with limited funds must also be able to invest in these markets and benefit from higher returns and regulatory protection.

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Camille Moussa

Camille Moussa is the director of ESA Executive Education

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