Taming the gung-ho investor
As representatives of China's 'new wealth', many well to do mainlanders adopt a gung-ho attitude to investment choices.
Used to prolonged economic expansion, they usually go for high-risk, high-return options and contend with the volatility of the mainland's equity markets.
'In general, Chinese investors are more dynamic and looking for more aggressive investment objectives,' says Richard Mak, managing director and head of advisory services for Pictet (Asia). 'But successful entrepreneurs and business people who have created their wealth over the past 10 years or so may want to 'cash in', and then capital preservation becomes the main concern.'
If circumstances allow for offshore holdings, Mak and his team can find themselves having to introduce clients to the benefits of diversification and a structured, more conservative approach to personal wealth management.
'Clients have varying objectives and we always look at things case by case,' Mak says. 'But the concept of diversification makes sense, transitioning from just stock trading to creating a long-term portfolio that gives steady returns and lowers the level of risk.'
Advocating this approach can be easier if the prospective client already has an international outlook, developed through business dealings or overseas travel. In such instances, the individuals concerned are more likely to appreciate China's exceptional situation and that bull markets don't last forever.
Understanding the lessons of asset bubbles, they also become more receptive to professional advice on managing their money.
'In a textbook case, we still have to convince clients bit by bit by concentrating on the importance of capital preservation,' Mak says. 'With the naturally more aggressive investors, that may mean we have to manage expectations if they think the forecast return is too low. Of course, if someone doesn't want steady returns and diversification, the final decision is client-driven. Our obligation, though, is to educate and explain, so that clients can see what generally works without getting burnt a few times first.'
As a rule of thumb, Mak notes that many of the newer high-net-worth investors have neither the time nor the training to follow market movements closely. Therefore, a recommended step when looking beyond mainland equities is to use instruments like mutual funds and exchange-traded funds (ETFs) that give exposure to the international sector.
Direct investment in individual stocks or bonds is still possible, but this usually requires more active supervision and involvement.
'Investors who are less sophisticated, less active, or have limited knowledge of global financial markets are generally better off using different managed funds to achieve broader diversification,' Mak says.