How to choose an appropriate investment strategy


Planning your retirement early is important but choosing an appropriate investment strategy is also crucial. Hong Kong people are renowned being knowledgeable about financial markets. If you talk to people in the street, many housewives can quote you the latest interest rates on fixed deposits or exchange rates between Hong Kong dollar and foreign currencies.

At present, there are numerous types of investments in the markets and there are many so called ˇ§investment consultantsˇ¨ giving investment advice. Even there are many investment tips in the financial column of the local newspapers. How can people judge what types of investments are appropriate for him? These questions will be repeatedly asked by all the MPF scheme members all the time.

In terms of investment vehicles, to quote some example, they include Hong Kong dollar fixed deposit, foreign currencies deposit, bonds, equities, futures and options, jewelry and even antiques..ˇK.. etc. Each investment has a different level of risk and their long-term return also varies. For example bank deposit carries the risk if the bank were bankrupt. Foreign currency deposit depreciates if the exchange rate falls. Of course, equities, futures and options have a much higher risk than deposits or bonds.

What is investment risk? Investment risk is the volatility in capital value of your investment. The risk tolerance level of each person varies partly depends on his character and partly depends on his age. Can investment risk be avoided? Investment risk cannot be avoided but can be minimized. I will discuss this at a later chapter.

Why different people have a different risk tolerance level? Say for example, some people are very conservative. They may not be able to tolerate if they lose money on their investment (even this is just on paper). They may not be able to sleep or they may be very tense if their investment falls in value temporary. These people should not invest their money in high-risk investments even if they can invest for the long term. Their money should only be invested in capital-protected instruments. Of course, there is no free lunch in this world: high risk/high return; low risk/low return. But the most important thing is to structure an appropriate investment strategy suitable for him. On this point, I am afraid, there is no fixed rule to achieve this.

In the next chapter, I shall show you some historic examples of different return on different investment strategy.



Written by John Cheung on 31 Jan., 2000

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