New Year objectives

PUBLISHED : Monday, 04 February, 2013, 12:00am
UPDATED : Monday, 04 February, 2013, 4:37am

The week approaching the Lunar New Year seems like a good opportunity to go back to basics. This is a time for reflection and aspiration. Here, however, we must modestly confine our thoughts to the world of investment.

And in this world it is surprising how often people get so caught up in investment matters that they lose sight of why they are there.

There can only be personal answers to questions of investment objectives, there is no right or wrong here. Among individual investors the most common investment objective is to preserve and increase a stock of wealth. Along the way there will be any number of diversions such as schooling to be financed, a home to be purchased and so on. And then there is all the other stuff that falls under the category of temptation or, as some would have it, living. There's a very big list here ranging from holidays to clothes and, well, you know the rest.

So, how does the individual juggle short and long term objectives? First these need to be clearly defined. Assuming there is surplus cash to hand after living expenses have been met, the prudent investor will establish guidelines for how much money should be set aside for the long term, generally understood to mean retirement.

The investor, in this instance, is looking for comfort and security and this is hardly likely achieved by investing in complex instruments that cause the pulse to race at an unhealthy pace.

A long-term strategy involves a look at the history of long-term investment returns and understanding total return, which means capital appreciation plus yield minus investment expenses.

The history of investment, as this column has repeatedly argued, has shown that over time no other instrument has outperformed equities. Luckily, the proliferation of exchange-traded funds (ETFs) has made equity investment easier for individual investors. Most ETFs are not only beating the performance of managed funds but are doing so at a fraction of the cost.

There is no reason for non-specialist investors to focus on anything aside from ETFs. However, some regard equities as "risky" and say they do not understand stock markets. In this case they should not dabble in this field and will most likely concentrate on various forms of bank deposit, which brings them into a world of very low returns.

Many people who are fed up with these modest returns migrate to bonds in the belief that bonds are like bank deposits: secure and simple. This could not be further from the truth. Bonds are highly complex and most are not guaranteed the way that bank deposits are. Bond investing is complicated and individual investors can usually only access bonds through managed funds, with all the high costs this entails.

This means calculating the costs of investments and thinking about who handles the investment and what they charge to do so.

Meanwhile, many investors feel that they should be able to beat the markets by clever individual plays and they enjoy making these plays. But even the most self confident should define what can be called "risk money" as a component of their overall pool of investment resources. Risk tolerance varies and only the individual knows where their boundaries lie. It is alarming how many over or underestimate their risk tolerance. So it is worth giving this some careful thought.

Finally, investors really need to be more objective about the biggest investment they are likely to make: an investment in their home. In Hong Kong we get mesmerised by rising property prices but this is not to be equated with rising wealth, an issue that only arises when properties are traded. Everyone needs to live somewhere and selling a home for profit is only an option for those who really want to realise their assets by living somewhere cheaper, so home ownership is only partially an investment.

Meanwhile, even Westerners know that the traditional kung hei fat choi new year greeting literally means "congratulations on your prosperity" - let's hope it is so.