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Review and adopt good investing strategies
Asset price fluctuation can happen in a short period of time. Reviewing your asset allocation from time to time, or at least on an annual basis is an essential way to avoid potential loss. Besides, here are few strategies to adopt to potentially gain long term investment return.
1. Long-term investment
It is important to remember that you should invest for the long term and remember that market fluctuations are very normal. The following chart shows the yearly return of the MPF system from 2000 to 2021. Over the past 21 years, the MPF realised positive returns in 14 years and negative returns in 7 years.
Notable setbacks were often followed by a significant rebound. For example, negative returns in 2008 due to the global financial crisis were followed by a solid rebound in 2009. Such pattern was repeated in 2002 and 2003, in 2011 and 2012, and in 2018 and 2019. In the past 21 years, the annualized return of MPF up to October 2020 was 4.3% according to the Hong Kong Mandatory Provident Fund Schemes Authority.
When you invest for the long term, you may also benefit from the compounding effect. The compounding effect occurs when an asset can generate earnings that are then reinvested (or remain invested) in hopes of generating more returns. For instance, the dividends you earn from stocks can be reinvested and, like a snowball rolling down a hill, your portfolio value may increase, ultimately increasing the potential for higher returns.
A key component of the compounding effect is time. The longer period you invest, the higher return you may get.
For example: Tim starts to invest at the age of 25. He puts HK$1,500 into his portfolio every month for 30 years, which translates to HK$540,000 in total. Assuming the average return is 4.1% per annum, when Tim reaches age 65, his portfolio would be worth HK$1.6 million. But if Tim starts to invest the same amount each month, but starts 10 years later at age 35, his portfolio value would only be HK$1.06 million when he is 65 years old.
In Tim’s case, investing for a longer term – starting 10 years earlier if he starts investing at 25 versus 35 – exploits the compounding effect and helps him realize a higher potential investment return.
3.Dollar cost averaging
Market volatility is inevitable, but rarely lasts for long. The best way to navigate in unpredictable markets is to remain calm and invest regularly applying the dollar cost averaging method.
The dollar cost averaging method means investors invest a fixed amount regularly into a particular investment, regardless of unit price. When unit price is high, the same amount of money buys fewer units. When unit price is low, the same amount buys more units.
Investing regularly regardless of the financial market swings can drive down the average unit cost and, in the long run, you may buy the investment at a discount which could result in greater future profits.
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