Yvonne Sargent, 70, had a bad investment experience. After a divorce, the Lantau Island resident was left with a lump sum, which she invested in a London pension fund. It did well for seven years, then dropped below its original value, at which time her adviser asked her to move the money to a Dubai-based firm.
The adviser was a family friend but, Sargent was still sceptical, particularly after she found out the adviser had moved the funds without her permission.
'For two days I did not know where my money was.' Her son interceded and the money was recovered, but she lost all faith in her adviser.
'I really hate this; I never had to deal with investments before, but after my divorce I was landed with all this and it was not funny because I have no experience of handling money,' adds Sargent.
Sargent's story points to the many challenges personal investors face in terms of managing their money. Interest rates are low, inflation is high, equities markets are choppy and there are too many examples of investors losing money to unscrupulous advisers who lure people into bad products.
No wonder, then, that Hong Kong's financial advisory industry is going through tough times. After mini-bonds and accumulators, and with returns so low, many people find it hard to make the leap of faith required to start investing.
But there are ways that ultra-conservative investors can earn a bit of income through simple, highly rated products.
Bear in mind that a lot of investors have so little faith in markets and advisers that they put large amounts of their savings in term deposits.
These are protected by the Hong Kong government's Deposit Protection Scheme. But the yield on term deposits is terrible. HSBC pays just 0.2 per cent for a 12-month deposit of HK$1 million or above, and this is a fairly standard return seen at the banks. So with this very low return in mind, for people who only want to beat the rate of return of fixed deposits, there are some fairly straightforward investments out there.
First, a disclaimer: this article mentions certain funds, stocks and bonds, but is not a recommendation to buy any of these securities. The discussion is meant only to indicate the risks and returns involved with a conservative investment strategy.
When asked to recommend safe and simple investments, financial advisers and investment specialists at private banks tend to focus first on bond funds.
Their first question would be to ask investors in what currency they calculate returns. For Hongkongers the answer is easy - Hong Kong dollars. But most would be equally comfortable with US dollars.
Most bond funds often involve investments in multiple currencies and, therefore, foreign exchange risk.
With that in mind, one could start with the Franklin US Government Securities Fund. As the name suggests, the Franklin Templeton managed fund is entirely invested in US government debt, and denominated in US dollars. The returns are slow and steady, with very little volatility. The fund yields about 2.31 per cent, according to a fact sheet dated February 29.
Bond funds typically involve expensive upfront fees, and the Franklin Templeton fund is no different. The fact sheet says that selling commissions may amount to 5 per cent of the amount invested. There are annual management fees of 0.65 per cent, and other charges.
The ability of fees to eat all returns generated in the first few years is a downside of bond funds.
'The unit trusts and mutual funds in Hong Kong that I'm familiar with carry high sales charges,' says Tony Noto, a Shanghai-based financial adviser. 'When interest rates are around 1 per cent it's tough to justify a 2 per cent to 5 per cent sales charge, or 1 per cent plus annual expense ratios.'
Expense ratios are a comprehensive measure of a fund's total charges. They include management and administrative fees.
One way to get around that is to buy exchange-traded funds (ETFs), which have low upfront fees and expenses.
By way of reference, Noto points to the ABF Pan Asia Bond Index Fund (2821), a Hong Kong-listed fund invested in local currency government and quasi-government bonds in eight Asian markets, including the mainland and Hong Kong. The fund is managed by State Street, a global asset manager.
The fund's top 10 holdings are government bonds issued by Hong Kong, the mainland, South Korea and Singapore. The average yield is 3.219 per cent, according to its fact sheet. Because the fund is an ETF, upfront fees in the form of the selling commission should be as low as any stock, say 50 basis points (half of one percentage point).
The expense ratio is also low: just 0.19 per cent, according to the fact sheet.
Noto also cites the ABF Hong Kong Bond Index Fund (2819), which is managed by HSBC. As the name suggests, the fund is entirely invested in Hong Kong bonds, primarily government debt.
In the period January 2006 to July 2011, the dates for HSBC provided dividend payment records, the fund registered an average annualised yield of 3.8 per cent, according to its fact sheet. The fees are low - just brokerage commission to buy the fund and an annual management fee of 0.15 per cent.
Bond ETFs are safe but not bulletproof. During market panics, they are prone to drops just like any other traded security, even if the underlying bonds are far from a risk of default.
For example, the ABF Pan Asia Bond Index Fund fell 5.9 per cent in the space of a few weeks in September-October 2011, when debt markets were feeling the worst effects of the Greek sovereign debt crisis.
This all falls into the caveat of no free lunch. The move up in yield from fixed deposits involves some risk.
One great investment does tick all the boxes - it's safe, in the local currency and has a decent yield. This is the Hong Kong Monetary Authority's inflation-linked bond (iBond) issued in July 2011. The bond links its coupons to the local inflation rate. Based on its first interest payment (in January) it yields an annualised 6.08 per cent.
That's a pretty spectacular return for the AA+ rated (Fitch) security. It's ideal except for one thing: it's not a real market instrument. The bond was effectively a government giveaway meant to help citizens cope with the effects of inflation. The returns are well above what a real, market-based, instrument would pay.
Evidence of this is seen in the price of iBonds in the secondary market, where they trade at 107 per cent of face value, according to Noto.
The HKMA may give Hongkongers another gift in the form of more iBonds. Otherwise, investors seeking yield have to move up the risk curve.
Robert Jones of Hong Kong-based FCL Advisory, which advises mid-sized investors known as family offices, suggests looking at short-dated sovereign debt - one to three years - of highly rated countries such as Australia, Korea or France.
For example, three-year triple A-rated Australian government bonds pay a coupon of 6.25 per cent.
Private banks can help individual investors buy sovereign bonds directly (not through a fund). But this is a serious purchase. Investment specialists at private banks say that individuals would need to commit to a US$100,000 minimum investment to directly buy such debt.
The alternative, of course, is to get the same exposure through a bond fund, and pay the associated fees.
Alan Luk, head of private banking and trust services at Hang Seng Bank, says Hongkongers have a local advantage in access to dim sum bonds.
Dim sum bonds are yuan-denominated bonds issued in Hong Kong. The instrument has been used by some highly rated offshore issuers, such as McDonald's. While the investment involves currency risk, the yuan is attractive in that it is fast becoming accepted in Hong Kong shops.
Furthermore, the yuan is still a managed currency with limited volatility against the Hong Kong dollar and, most assume, potential for appreciation.
'If you take a medium-term note from a financial institution in China or McDonald's you can get yield enhancement of 2 per cent to 3 per cent. And you get yuan appreciation of 2 per cent to 3 per cent, for a total return of about 5 per cent to 6 per cent,' says Luk.
Going up the risk curve, investors could consider high-dividend stocks, such as Hong Kong's venerable The Link Reit, which pays a dividend yield of about 4.15 per cent, according to Bloomberg.
In the Hong Kong market, blue-chip stocks typically pay dividends that easily beat fixed deposits. Swire Pacific stock has a dividend yield of about 6.76 per cent, for example.
Blue-chip investing involves market risk - stocks can trade down. Even the biggest and most highly regarded firms are known to withhold dividends and, in extreme cases, go bust - Enron's bankruptcy in 2001 is just one example.
Investors should always understand the investments they buy. The instruments discussed here are all straightforward and simple. By comparison, structured products and insurance-linked savings plans can be extremely complex and steeped in hidden fees.
'Investors are often offered high income through structured products, high-yield bonds of lower rated companies, short-selling warrants and options. But these investments are best left to professionals,' says Jones.
Even relatively straightforward instruments, such as dual currency deposits, have complications such as currency risk. Many dual currency deposits are linked to Australian dollar rates and currency, which has been volatile in recent years.
People need to be aware of currency risk. For example, in 2008 the Aussie dollar went to a high of 98 cents against the US dollar, in July, then plunged to 60 cents in October that year. It was a dramatic drop that would have hurt a lot of Hong Kong's dual-currency deposit holders.
But the last caveat is that there are risks to being uninvested. Inflation will erode the value of money stuck in a fixed deposit. Indeed, most of the income investments outlined in this article will not beat inflation.
Fixed deposits and related conservative investing strategies will only get a person so far. Ultimately, a little extra risk in one's portfolio is prudent, if not necessary. Even conservative investors should consider putting part of their savings into a diverse equities fund, for example.
Noto says that if investors stick with bond funds and certificates of deposit, 'then they're going to have to save a lot more money for their long-term goals. Extremely safe fixed-income investments aren't going to be generating returns much higher than inflation, and occasionally will be returning less.'
Adds Ivan Leung, chief investment strategist of JP Morgan Private Bank in Asia: 'Holding a cash deposit is guaranteeing you a loss.'
There is risk to the no-risk position, and that's the slow-motion wealth destruction brought by inflation. Bystanders are implicated. Non-action is a decision and not always the best one. It's best to open your eyes to the situation and consider your options.