Historic examples of different return on different investment
In the last chapter, I have mentioned about risk of different types of investments. Assuming different level of risk has a direct impact on the future return of the investments. In turn, this will affect the final amount you will receive after retirement. Let me show you how different rates of return affect the final amount. Again I shall use Mr. Nice as an example.
Mr. Nice joined the company's provident fund scheme at the age of 25. The total monthly contribution is $1,000. Assuming the scheme has 4 types of funds with different risk profile:
Fund ¡VA a capital-protected fund with a targeted return of 5% p.a.
Fund - B a medium risk globally diversified fund with a targeted return of 10% p.a.
Fund - C a high-risk growth fund with a targeted return of 15% p.a.
Fund - D a high-risk growth fund solely invested in HK stocks with a historic return of 16% p.a.
If he invested all the contribution in each of the 4 funds, after working for 40 years, the total amount Mr. Nice will receive when he retires at the age of 65 would be:
Fund-A $ 1,533,378
Fund-B $ 6,377,780
After looking into these figures, which fund will you invest?
It would be quite easy for someone to select Fund-D because the final sum is much larger than the others are. However, you have forgot the risk and the volatility of each fund. They are as follow:
Fund-A low volatility, chance of negative return in any one year is zero.
Fund-B low volatility, approx. one in every eight years, the fund may show a Negative return.
Fund-C high volatility, approx. one in every four years, the fund may show a Negative return
Fund-D high volatility, approx. one in every four years, the fund may show a Negative return.
If Mr. Nice retires on one of the negative years, his final benefit will suffer as well. So it will be advisable if he adjusts his strategy from time to time to cater for the change of his risk profile.