Laith: From Fear of Investing to a Clear Financial Plan

After completing his college degree and starting his career, Laith sat one evening reflecting on his financial future.
He dreamed of having an emergency fund that could cover six months of expenses if he lost his job, and he also wanted to save for a home and new furniture. Although he wasn’t yet thirty, he knew that the best time to start thinking about retirement was now.

Yet, he found himself facing a big question:
“What should I do with my savings?”

Friends’ Experiences and the Risk Dilemma

During one gathering, his friends shared their experiences:

• Nada proudly said, “Imagine! I doubled my money in just one year after buying Facebook stock!”

• Eyad added, “I tripled my money quickly after investing in Netflix!”

Laith got excited but remembered his uncle’s story, who had invested in Boeing.
In early 2020, the stock plummeted from over $300 to under $150 within months, causing significant losses.

“Is investing in stocks a risky gamble, or an opportunity for high returns?” he wondered.

The Balance: Safety vs. Growth (Risk-Return Dilemma)

Laith started reading and researching. He discovered that investing is like a balance between safety and growth:

• Safety: Found in cash instruments such as savings accounts and short-term deposits.

• Growth: Found in stocks and investment funds, but comes with higher risk.

Strategy:

• Short-term goals: Emergency fund and saving for a home → low-risk instruments (Risk-Free Rate) → returns are low but very safe.

• Long-term goals (retirement): Stock market and investment funds → returns can be higher, but with more volatility and risk.

The Key Lesson: Diversification and Beta (β)

While researching, Laith learned a fundamental concept called Beta (β), which helps him understand how a stock fluctuates relative to the market:

• If Beta = 1, the stock moves with the market.

• If Beta > 1, the stock fluctuates more than the market (higher risk).

• If Beta < 1, the stock fluctuates less than the market (more stable).

Example: Technology stocks often have high Beta (>1), while food company stocks usually have Beta <1.

Laith realized that his uncle lost heavily because he put all his money into a single, high-risk, volatile stock, representing unsystematic risk, which can be avoided.

Solution: Diversification

• If his uncle had spread his investments across a diverse portfolio of companies in different sectors (technology, food, industrials), losses would have been much smaller—or he might even have earned profits.

• Laith also learned about index funds, which invest in all major companies in the market, reducing risk compared to investing in a single stock.

Risk Premium

Definition: The difference between the expected market return and the risk-free rate.

Example: If the market returns 8% annually and the risk-free rate is 3%, the risk premium = 5%.

This premium is the “reward” for bearing market fluctuations.

Laith Meets CAPM

While researching, Laith discovered CAPM – Capital Asset Pricing Model, which changed his thinking:

 Expected Return = Risk-Free Rate + Beta × (Market Return – Risk-Free Rate)

In simple terms:

• Risk-Free Rate = safe return from bonds or deposits.

• Beta = measures stock volatility relative to the market.

• (Market Return – Risk-Free Rate) = risk premium.

Numeric Example:

• Risk-Free Rate = 3%

• Market Return = 8%

• Stock Beta = 1.2

Expected Return = 3% + 1.2 × (8% – 3%) = 9%

Conclusion: A Clear Financial Plan

• Short-term: Emergency fund and home savings → safe instruments that preserve capital.

• Long-term: Diversified portfolio of stocks and index funds → apply CAPM to understand risk and return relationships.

Laith smiled as he wrote in his notebook:
“The key lesson: There are no big gains without risk, but diversification and scientific understanding like CAPM help me make smarter decisions.”