Investment Guide
I am still young and have much time to accumulate my wealth later. As I don’t have much money to invest now, I might as well make bigger investment later?
Many people postpone or waver in their investment decisions due to short-term market volatility or other reasons. The following example illustrates how early investment helps build larger wealth:
Investing early to benefit from the power of compounding
- The investments of Mr A and Mr B have the same investment period (10 years) and annual rate of return (8%). - But Mr A starts investing 10 years earlier than Mr B. - And the investment amount of Mr A is half of that of Mr B.
For Illustration only*:
*The cases are for illustration purposes only and are not intended to predict or project any investment results.
With the compound interest effect of 8% annually, Mr. B’s wealth, from his principal of $200,000, accumulates to about $313,000. The potential return is approximately $113,000 after cost, or a hefty 56% increase.
But Mr. A’s result is even better, as he has ten more years to accumulate his wealth than Mr. B, his wealth grows from $100,000 to $337,000. The potential return is $237,000 after cost, which is a remarkable 238% increase.
Mr. A
Mr. B
Year
Investment Amount
Year-end Value
Yr 1
$10,000
$10,800
$0
Yr 2
$22,464
Yr 3
$35,061
Yr 4
$48,666
Yr 5
$63,359
Yr 6
$79,228
Yr 7
$96,366
Yr 8
$114,876
Yr 9
$134,866
Yr 10
$156,455
Yr 11
$168,971
$20,000
$21,600
Yr 12
$182,489
$44,928
Yr 13
$197,088
$70,122
Yr 14
$212,855
$97,332
Yr 15
$229,884
$126,719
Yr 16
$248,274
$158,456
Yr 17
$268,136
$192,733
Yr 18
$289,587
$229,751
Yr 19
$312,754
$269,731
Yr 20
$337,774
With a ten-year difference, the wealth of Mr. A jumps 238% while that of Mr. B grows by only 56%. This is due to the fact that compound interest will increase the principal. When multiplying the annual rate of 8% and a bigger principal, the wealth accumulates faster with the snowball effect.
Principal: $100End of Yr 1: $100(principal) x 8%(interest rate) = $108 (compound amount)End of Yr 2: $108(principal) x 8%(interest rate) = $116.64 (compound amount)End of Yr 3: $116.64(principal) x 8%(interest rate) = $125.97(compound amount)
The above example shows that even if the principal doubles, the effect on wealth accumulation may not be as significant as that of compound interest. It may be wise to start investing early to enjoy bigger reward brought by the power of compounding.
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How can I capture investment opportunities amid market volatility? When is the right time to buy?
Investors generally believe that they can buy at low. However, this is unrealistic as even the professional investors cannot accurately capture the peak and low every time.
Instead of spending time and energy on timing the market, and having to put up with all the emotional strain, it seems more reasonable to follow the ‘Dollar Cost Averaging’ strategy, a widely recognised investment approach. It is more cost effective to invest a fixed amount regularly against the rapidly changing market.
Regular investment – Dollar Cost Averaging
The “Dollar Cost Averaging” method suggests investors to keep investing a fixed amount regularly, for example HK$1,000 on a monthly basis, regardless of the market trend. If the price of an investment changes from January to December as stated in the example below, the number of units bought every month would be different as more units would be purchased when the price is low and vice versa.
Average price during the period (HK$)
10.4
Average unit cost (HK$)
9.9
Earning per unit (HK$)
0.5
* The chart is hypothetical and for illustration purposes only and is not intended to predict or project investment results.
The above example shows:
-The average price per unit during the period is $10.4. If investing according to the Dollar Cost Averaging approach, the investor buys 1,208.7 units with $12,000 at the unit cost of less than $9.9, $0.5 lower than the average price. - The risk bore by the investor may also be lower as the chance of misjudging the market and buying at peak or selling at low can be avoided.
People think that investing is a very rational behaviour, is that true?
Investing seems like a rational behaviour as investors usually contemplate various factors, use their calculators, look at graphs, analyse financial reports of companies and determine the price at which they would buy and sell. However, behind all these seemingly rational investing behaviours, investment decisions are likely to be driven by emotions.
Cycle of Market Emotions
Most investors are involuntarily affected by the ‘cycle of market emotions’ when making their investment decisions. Bullish and optimistic market sentiments may easily prompt the investors to buy at peak, overlooking the highest risk it presents. Similarly, when the market is full of pessimism, investors are again easily affected and make the wrong decision to sell and leave, forgetting that the low presents the highest potential of investment gains.
According to a HKEx survey, retail participation in HKEx’s stock market reached an historical high in 2007, both in number of investors and in percentage of adult population. 35.7% ( or 2,204,000 individuals) of HK’s adult population participated in the stock market.
The stock market experienced a rally in 2007, the Hang Seng Index rose to an historical high of nearly 32,000 points in October. However, during 2003 when the stock market was low due to the SARS outbreak, retail participation in the stock market was only 17.5% among adult population.
Source: HKEx, <HKEx Retail Investors Survey 2007>
- As investing is a behaviour prone to be affected by emotions, investors should be careful not to be influenced by negative emotions like greed and fear. - Try to bear in mind several investment rules. First, one should understand that the market goes up and down. Investment is for long-term. Don’t panic when the market falls as the market low may offer the highest potential of investment gain. Investors should learn to tolerate the market volatility and analyse the market sensibly. - Avoid timing the market as even professional investors fail to do so. - In order to achieve the long-term goal, investors can invest by intervals. They can also seek professional advice and formulate a comprehensive long-term investment strategy to counter the effect of emotions.
Smart Tips for investing in AsiaThe global economy has been gradually recovering since the financial turmoil more than a year ago. With strong economic growth in China, the Asian economies were amongst the first to recover and emerged to be the top choice of many investors. Indeed, Asia embraces plenty of investment opportunities plus relatively higher volatility at this point, so there are some tips that investors may take into consideration when investing in Asia.
Tip 1: Be aware of the volatility behind Asia’s powerful reboundEven though exports were inevitably affected by the crisis at first, with strong demand and domestic consumption in China a number of markets in Asia began to rebound in the second quarter of this year. As a result of its four trillion Yuan stimulus package, China’s growth jumped back to 8.9%1 in the third quarter. Meanwhile, the third quarter GDP growth of South Korea recorded the fastest quarter-on-quarter rise since the first quarter of 20022 , and others like Taiwan have benefited from their increasingly closer economic ties with mainland China. In fact investors are no longer considering whether or not to invest in Asia, but how they can tap the best opportunities arising from the Asia growth story.
There is no doubt about the immense potential of the Asian market. However, investors should be reminded that Asia is still an emerging market which may be relatively unstable. The global financial crisis is, to a significant extent, primarily a financial crisis in the United States and Europe, but nevertheless it does have a large global impact, and if there are going to be more financial disasters in the United States or Western Europe then the impact might spread to Asia too. Also, the recent exit policies for the stimulus packages in the West may easily pose risks to the global economy as well. If we look at the Asian market, taking China as an example, the recent growth mostly comes from government stimulus efforts and the money has been spent on building infrastructure, roads, power stations and bridges. The question is, when the government spending slows down can the economy still sustain a healthy growth? And would it impact on Taiwan as well as its economy is closely linked to mainland China? With all these potential risks in Asia, investors should pay extra attention.
Tip 2: Fair geographical allocation, balance market risks and catch the bull-runThe economies in Asia are all different and have developed in diverse ways over the past two decades. It seems difficult to catch the latest rally in the region and, if you overly focus on a certain market, when it goes down your overall portfolio may be affected. Conversely, if you invest too little in another market, you may miss some spectacular opportunities. In view of this, there are funds which adopt a country allocation which is the same as the MSCI AC Far East ex Japan Index. These funds are able to smooth out performance through neutral regional asset allocation which also helps them to take part in the bull-run in each market in the long term.
Tip 3: Appropriate stock picking attribute to potential returnsHigh dividend equitiesStocks which have a stable or high dividend distribution policy have historically provided higher returns. Look at the MSCI AC Far East ex Japan Index; it has grown by nearly five times since 1989, and the top 20% stocks paying the highest dividends have grown dramatically by nine times – which is over 500% higher than the index3 . This is not difficult to understand since, in general, companies which are able to pay good and stable dividends are financially mature and reliable with clear management direction. They are usually highly regarded by funds, giving them a chance to shine. In fact, dividend-paying stocks are generally able to achieve relatively better performance than non-dividend payers during tough times as attractive dividends serve as a cushion to the downturn.
Value equitiesNo one would deny the investment prospects in Asia. Having said that, amongst the hundreds of listed companies across the region, which ones are good for investment? Stock performance may also be influenced by various factors such as economic data, corporate results, interest rates and capital flows. A valuable stock is driven by various factors such as profitability, valuation, dividend yield, cash flow strength and balance sheet risk.
Tip 4: Choose experienced fund managersWhat a challenge for ordinary investors to tackle all the tips! Our advice is that funds with a strict and comprehensive stock-screening process, rich experience and a dedicated focus on value may be able to help investors catch attractive opportunities by picking the right stocks and selling / buying at the right time.
1Bloomberg, 22 October 20092Bloomberg, 26 October 20093Sensible Asset Management Limited, June 2009
Do you know that 90% of the return on your investment portfolio depends on asset allocation?More than 60% of millionaires in Hong Kong (with net assets of at least US$1 million) were swept away by the financial crisis at the end of 20081 . The situation is worth some thought, especially in relation to wealth management. Some investors emphasise the significance of catching the right “buy and sell” opportunities. In reality, there are only very few who are successful in grasping the opportunities. Studies show that the performance of an investment portfolio largely (90%) depends on asset allocation2 . Ask Warren Buffett and you will know how he made a fortune from long-term investment in both equities and bonds.
Proportion between equities and bonds may affect potential investment returnsAssume both Mr Li and Mr Chan had US$1 million at the end of 2007. Mr Li put 80% of his money in stocks and 20% in bonds. The financial crisis in 2008 has caused him to lose 40% in stocks and gain 10% in bonds. Eventually, he has US$700,000 left (US$480,000 in stocks plus US$220,000 in bonds). In the meantime, Mr Chan invested 20% of his wealth in stocks and 80% in bonds. His stocks have shrunk by 40% but his bonds have grown by 10%. At the end of the day, Mr Chan is still a millionaire (US$120,000 in stocks plus US$880,000 in bonds). Why is it so? The only reason is the different mix of equities and bonds in their investment portfolios*.
In general, equities involve more risk but can result in comparatively higher returns, and so are more suitable for aggressive investors. Bonds give stable returns with lower risk and are good for people seeking stability. It is unwise to put all your eggs in one basket. Thanks to their different characteristics, equities and bonds naturally make an ideal combination to diversify investment.
Asset allocation determined by life stage and risk toleranceThe mix between equities and bonds directly affects the level of risk and performance of a portfolio. An aggressive portfolio may be up to 80%-100% in equities since it is capable of tolerating more market volatility. A growth portfolio may be 60%-80% in equities. A balanced portfolio may be 50% in equities and 50% in bonds. Lastly, a stable portfolio may be mostly in bonds, between 60% and 80%. The allocation varies according to different life stages and levels of risk tolerance.
Reduce risk and increase higher potential returns with diversification and multi-managersPeople see risk in different ways. A person’s risk tolerance level depends on a series of factors such as investment goals, the need for cash flow, personality and investment preference and experience.
To reduce risk, besides an optimal mix of equities and bonds, investors may also diversify their investment in different geographical locations, industries, themes and styles. Geographically there are plenty of choices between developed markets and emerging markets as the speed of economic development varies amongst markets. But can you always pick the winners?
A diversified portfolio with reference to your personal goals may help reduce risk and lead to higher potential returns (not profit guarantee). But one more question: Do you know when to buy and sell your investment at the right time? No single market, sector, stock, asset or even fund manager is always the best. Therefore, a portfolio managed by multi investment managers with diverse expertise is critical in a portfolio’s long-term excellence. Their differences in investment styles, disciplines and philosophies may complement one another.
Timely review and adjustment to fit your needsIt’s important to understand that no allocation strategy works forever. The market is evolving, and so is life. The performance of assets changes in different market situations. In 2008, the stock markets plunged but bonds did well, whereas it was the reverse just a year before. Likewise, one may find an aggressive portfolio suitable today but adjustment may be necessary in the future. Therefore it is important to review a portfolio regularly, including the performance of all assets and the investor’s financial needs and risk tolerance, prior to making any appropriate adjustment.
An Asia-based portfolio is set to achieve the best potential returns todayThe financial crisis has fundamentally changed the nature of the investment market. Developed markets in Europe, the United States and Japan will take time to recover. In contrast, Asian markets together with other emerging markets were previously considered risky. But owing to strong growth in domestic demand and the overall economies, there is more obvious growth potential in the long term. Meanwhile, industries such as property and energy are better able to resist the threat of inflation. As a result, not all conventional thinking is still applicable when determining a portfolio. Today, Asia-based portfolios, rather than those focusing on European or US equities, are considered optimal portfolios set to achieve better potential results.
Investment allocation is a strategy. Indeed, wealth management does not rely on picking the right stocks and catching the right time, but rather on proper asset allocation with the intention of capturing growth potential in the long term.
1Capgemini and Merrill Lynch Global Wealth Management - World Wealth Report 2009, 24 June 20092 "Determinants of Portfolio Performance II", Gary P Brinson, L. Randolph Hood and Gilbert L. Beebower, Financial Analysts Journal, January – February, 1995, pages 133 – 138* This example is hypothetical; individual results will vary. This is not meant as investment advice.
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Investment involves risks. Fund prices may go down as well as up. Past performance figures shown are not indicative of future performance. Please refer to the prospectus for further details including the risk factors, charges and features of the product. Investor has his/her own personal investment objectives and investment products may not be suitable for everyone. Investor should not solely rely on this website to make any decision to invest in an investment product and should seek independent professional advice if necessary.
Dollar cost averaging cannot help you avoid investment loss. The dollar cost averaging effect works better in more volatile situation in comparison with less volatile situation. The effect may be diluted in less volatile situation. You may suffer investment loss if the situation consistently drops. The payoff will be dampened if the valuation point is on the low side. Also, you may forgo the opportunity to achieve a higher investment return if the situation consistently rises. Frequent investment switching may defeat the purpose of regular investments and you could miss the opportunities on the low side.
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