Kung hei fat choi! The festive season is upon us, and all week you’ve been meeting your parents, relatives, family friends, and dad’s colleague-from-work-who-last-saw-you-as-an-infant. It has, hopefully, been a time filled with happy reunions and good food. Happily, you may also be flush with cash. Now what? Well, first, do treat yourself a bit. Those bills are just some high production value paper if you do not spend them. But don’t blow all of it away; future you will be thankful for the money you save and invest today.
If you have been paying attention to the news, you may have heard that interest rates are increasing, which is good for savers. That is true: over the past few years, the Federal Reserve Bank of the United States has lifted interest rates from what was pretty much 0 per cent to the current rate of between 2.25 per cent to 2.5 per cent. These interest rate increases in the United States have been directly transmitted to Hong Kong, because the Hong Kong Monetary Authority (HKMA) maintains a (nearly) fixed exchange rate between the US dollar and the Hong Kong dollar. When rates go up in the States, the HKMA has to follow, or people would convert their HKD into USD to take advantage of the interest rate differential – the difference in interest rate between two currencies. The sale of HK$ to purchase US$ would lower the value of our currency and threaten the pegged exchange rate.
So that’s the economics behind interest rate increases, but what does this mean for your savings account? (Or your mum’s, if that’s where the your windfall gets stashed!) HSBC, for example, has indeed raised rates on Hong Kong dollar deposits. In fact, savings rates were raised to 125 times the level they were at before September 2018! Excited? Don’t be. Interest rates used to be 0.001 per cent, which would give you an almighty 10 cents per year on a deposit of HK$10,000. Now, at 0.125 per cent, you would get 12.5 dollars annually – in three years time, you’d be able to get a grande chai latte from Starbucks for free.
So, what can a wise money manager do to improve upon those miserable returns? Consider investing. Don’t go picking up the Business section from the SCMP just yet, though. Picking stocks that will be successful – that outperform the broader market – is notoriously difficult. There is a lot out there to read about investment strategies, but the fact remains that even professional money managers have a dreadful record when it comes to sustained investing success.
It is extremely hard to predict the future, and it is even harder to overcome the psychological biases that will push you to buy stocks when the market is exuberant and overvalued – you will likely want to jump in on the action – and then to sell them at a loss just as the numbers start to drop across the spectrum.
Thankfully, you need not beat the market to make money – you can simply track it. Warren Buffett, arguably the most successful stock-picker of all time, advises that small investors buy into “index funds” to generate long-term returns. Index funds, pioneered by the late fund management legend Jack Bogle’s Vanguard Group, maintain a basket of stocks designed to copy the broader market – be that the S&P 500, or the Hang Seng Index. Because these funds are passive, as opposed to active funds in which managers make stock-picking decisions, fees tend to be really low. Investors should always be aware of the fees they may incur when they make forays into the market – particularly with actively managed funds, this can be the difference between making and losing money.
In the very long run, the stock market has returned about 7 per cent a year, when dividends are reinvested. Of course, that certainly does not mean you will make 7 per cent every year, nor does it even mean that the market will return 7 per cent in the future more generally.
If you choose to get into index funds, when should you do it, and how? Much as picking stock market winners is a treacherous business, so to is timing your entry into the market. And if you chose to invest the week after the Lunar New Year, that would, after all, be a somewhat random time to take the plunge.
Therefore, consider dividing your potential investments into 12 equal portions, investing into the market each month. You can begin the cycle again when the Year of the Rat rolls around. This is know as dollar-cost averaging, and implies that you will buy fewer shares when the market is expensive, and more when the market is cheaper. As a result, you avoid the risk of entering the market at the top, and your average entry price is mathematically lower than the market’s average price. If you have an account with HSBC and want to invest in the Hang Seng Index, you can consider using their free Monthly Investment Plan to buy the Tracker Fund of Hong Kong (2800.hk), which is the primary index fund in the city.
May you prosper on your journey with investments this year!
Yashvardhan Bardoloi is an Applied Math and Economics student at Harvard University in the US. He is also an incoming Summer Investment Analyst at Goldman Sachs.