This volatility can also have a direct effect on your MPF savings. Here are three things you may like to consider when investing during volatile times.
The payment of monthly contributions to the MPF system not only serves as a positive savings habit, but it also benefits the saver by utilizing “dollar cost averaging”. When the market rises, the number of fund units purchased with the same monthly contributions decreases over time, and vice versa when the market drops.
For example, if the monthly contribution of a member is HK$1,000, and the price of the fund unit is HK$100, the member can purchase 10 fund units. In the next month, if the fund price drops to HK$90, the same HK$1,000 contribution buys 11 fund units. By making regular contributions over an extended period, the price of the units purchased will be averaged out.
Further, this approach can, to some extent, reduce the risk of making a wrong decision on market timing. Even professional investors sometimes employ this approach as it is difficult to make consistently accurate decisions on the state of a particular investment market. This is even more difficult for the general public.
The second item to consider is that saving for retirement will, in most cases, involve investing for the long-term.
In the case of younger MPF members, this could be 30 to 40 years. Try not to be too sensitive to short term market fluctuations. During the retirement savings journey, your MPF investment funds will be exposed to multiple economic cycles, with consequent short-term fluctuations, up and down. Investors are often influenced by short-term blips and these can impact judgment on market timing and rational decision-making.
Long-term investors should make investments in accordance with their own risk tolerance level. When market conditions fluctuate during the investment journey, it doesn’t mean that you should panic and start selling investments in response. This also applies in times of very adverse market conditions. And, if members continue to invest during the recovery period, members will be buying funds at cheaper prices, thereby reducing the average unit fund price – as discussed above.
The last suggestion is to spread your savings over a range of different investments - never put all your eggs in one basket. Diversification of your investment savings can be at the asset class level as well as at the regional or industry level.
When an unfavorable market event occurs and the value of assets fall, the idea is that there will be other asset classes that are less adversely affected, or even increase in value. It is suggested that members’ investment portfolios should contain both stocks and bonds, for example, because the correlation between these two types of assets is low. This approach, whereby the assets behave differently, effectively reduces the volatility of the investment portfolio. The amount to be held in each asset class is left to be determined by each investor according to their individual appetite for risk.
In addition, within each asset class, members can further diversify by investing in different regions or sectors. Some factors may only impact specific regions or industries. For example, the tightening of industry regulations by the Chinese Government may only have a limited impact on Europe, U.S. and other regions. Another way to diversify is to consider he Default Investment Strategy (DIS) within the MPF, comprising 2 funds, i.e. Core Accumulation Fund and the Age 65 Plus Fund. Both are mixed asset funds that make investments in different assets classes around the globe.
In volatile times, you may observe short term losses in fund value. However, keep these three strategies in mind, and you will hopefully look forward to achieving satisfying investment returns over the period to retirement.
This article in English and Chinese is available for download.
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| Volatile investment markets - three things to consider in the context of your MPF savings | .3 MB |
