Your Financial Goals and Life-Stage Investing
RETIREMENT PLANNING
Life Planning
Different Stages of Life
Different Types of Investments
Different Stages of Life
Your Financial Goals and Life-Stage Investing
As life goes on, your financial needs evolve as well:
Wealth Planning to achieve your financial goals
- The concept of wealth management kicks in when we want to make sure we have enough money to finance our spending.
- At the same time, we want to accumulate wealth for ourselves and also the next generation.
- Remember, when we do our wealth planning, inflation is a key factor for consideration!
How to beat inflation?
What is inflation?
There goes a saying that “in this world, nothing can be said to be certain, except death and taxes”. And we can add “inflation” to the list in modern days.
| Average annual inflation | |
|---|---|
| China | 5.1% |
| Hong Kong | 4.2% |
Source: https://tradingeconomics.com , as of 2020.
Inflation Rate in China averaged 5.1% from 1986 until 2020. Inflation Rate in Hong Kong averaged 4.2% from 1981 until 2020.
Suppose you can buy a burger set for $40 today and the annual inflation rate is 4%. Next year, the same burger set will cost 4% more at $41.6. It does not seem much, right?
Source: Invesco, as of October 31, 2020. For illustrative purpose only.
Strive to beat inflation and accumulate wealth
To beat inflation and accumulate wealth, one could consider making investments.
Criterion: Investments that generate returns that could potentially outperform inflation.
Some investments are well known to the general public:
Source: Bloomberg, as of Oct 30, 2020. Data from Oct 31, 1990 – Oct 30, 2020. The representative indices are: Hong Kong stocks – Hang Seng Index, US stocks – S&P 500 Index, Global Bonds – Bloomberg Barclays Global Aggregate Bond Index.
Things to note:
In order to make investments to counter inflation, investors need to have a long-time horizon.
Investment markets experience volatility from time to time.
To put this into practice, you could invest in equities and bonds directly, or you could gain access to these asset classes through mutual funds.
Different Types of Investments
Understand Different Types of Investments
Stocks
- An investor purchasing a company’s shares effectively owns part of the company.
- A shareholder may be able to get dividends.
Why do share prices go up and down?
- If more people buy a stock (demand) than sell it (supply) => price moves up and vice versa.
- Factors that affect stocks prices (supply / demand) include corporate earnings and market sentiment.
Bonds
- When a company / government issues a bond, it has agreed to repay capital plus interest on set dates.
- A bond investor, in effect, has lent money to the issuer.
- Some bond investors aim at earning a regular income. Others may try to profit by trading them.
For illustrative purpose only.
Why do bond prices go up and down?
| Factors | How does it impact bond prices? |
|---|---|
| Interest rates | When interest rates go down, bonds become more attractive - bond price rises and vice versa. |
| Market conditions | When market is risk-off, investors typically move to bonds from equities. Bond price could go up. |
| Credit Ratings | Bonds are assigned credit ratings by ratings agencies, such as Moody’s and Standard & Poor’s. The ratings signal the agency’s view of the issuer’s ability to pay interest and principal. If a bond’s credit rating is downgraded, the bond price will likely fall. |
Mutual Funds
What are Mutual Funds?
Mutual funds pool money from investors to make investments into stocks, bonds or other assets in one portfolio.
A fund manager chooses the underlying investments.
Different types of Mutual Fund?
| Mutual Fund | Underlying investments | Goals |
|---|---|---|
| Equity Fund | Invests in a basket of stocks. | Normally for long-term capital growth. |
| Bond Fund | Invests in debt securities normally issued by governments or corporations. | Normally for income. |
| Balanced/Multi-asset Fund | Invests in a mix of stocks, bonds, and/or money market instruments. | Normally a mixture of safety, income, and modest capital appreciation. |
| Money Market Fund (MMF) | MMF is a fund that invests in cash and short-term debt securities. It is considered one of the least risky investments, generating income and highly liquid. | Normally used by investors to manage cash or short-term savings. |
| Exchange Traded Fund (ETF) | Invests in a basket of securities — such as stocks, bonds and commodities — that often tracks an underlying index. |
Normally to track the performance of a specific index. |
Benefits of investing in Mutual Funds
| Benefits | |
|---|---|
| Management | Professional management teams often involving fund managers and research analysts. It should be noted that mutual funds charge management fees to cover their operating costs. |
| Liquidity | Funds are more liquid because they tend to be less volatile compared with a single security. |
| Diversification | Offer diversification or access to a wider variety of investments than an individual investor could afford to buy. |
| Economies of Scale | Mutual funds take advantage of their buying and selling volume to reduce transaction costs for their investors. When you buy a mutual fund (comprising 20 – 50 securities), you diversify without paying the 20 to 50 transaction fees that would give you a similarly diverse individual portfolio. |
Investment involves risk. Please review all financial material carefully before investing. The value of mutual funds can be volatile and could go down substantially.
