Capturing the potential of the future world as we live smarter in the city
The investing potential of the future world – smart cities
Jul 2021 (3-minute read)
#1: Optimising savings from holiday spend
This summer, some Hong Kong residents would have extra cash-on-hand because of reduced personal travel spend amid current mobility restrictions. Some others have also received relief subsides from the government during the global public health crisis.
Hong Kong residents that generally take outbound vacations over the summer have been reluctant to do this year because of ongoing quarantine restrictions. Returning residents are still required to quarantine in hotels, for as many as 21 days depending on locations, dampening their willingness to travel overseas.
Hong Kong, alongside governments around the world, has been implementing stimulus policies to bolster their economies. Some Hong Kong residents have already received a relief payment of HK$10,000. Starting in August 2021, consumption vouchers2 totaling HK$5,000 will be given out to eligible residents. These vouchers can only be used on select items such as groceries, transportation etc., which may translate into savings of HK$5,000.
How could some Hong Kong residents optimise the extra savings from reduced spending on personal holidays overseas and regular necessary consumption, and make the cash-on-hand work harder for them in the long run?
Investors, depending on their investment objectives and risk appetite, could consider harness compounding1. As illustrated in the chart3 below, a sum of US$20,000 invested annually over a 40-year-period, at 5% growth a year, could potentially yield US$2.54 million, compared with US$1.23 million based on just cash deposits.
#2: When is the optimal time to start investing1?
It is crucial to start saving and investing early in order to optimise the benefits of compounding1.
Saving is one of the ways that most people in Hong Kong accumulate wealth4. It is typical that residents save their pay cheques and cash after expenses to meet their future financial needs for life’s big decisions.
Moreover, investors often think of cash as a low-risk option. Hong Kong investors on average allocate 37% of their retirement savings to options such as savings accounts, time deposits or insurance savings products4.
Although such cash-like options may be perceived to be low risk, they tend to achieve lower returns that may lag the rate of inflation. Hong Kong’s composite interest rate was 0.20% in May 20215, while overall consumer prices rose by 1.0%6.
Most also shy away from the stock market, fearing capital losses and unwanted risks in what appear to be volatile markets.
Even at times when the equity market is struggling, the bond market historically could present an attractive return opportunity compared to cash. Fixed income comes with its own risk profile when rates are rising, while bonds are generally allocated within a portfolio, with an aim of trying to lower overall volatility and striving for a more steady income opportunity.
The benefits of diversification and long-term investing7
#3: Good things can come to those who wait
Over the past 15 years, a well-diversified portfolio of stocks and bonds returned an average of 6.1% per year with lower volatility than a pure equity portfolio, as demonstrated in the chart8 below.
While markets can always have a bad day, week, month or even year, history suggests investors are less likely to suffer a bumpy ride over longer periods. Still, keep in mind the time horizons of your financial goals.
And volatility is normal. Markets move in cycles and through peaks and troughs - it is almost unheard of for performance to only ever move upward. However, when popular signals start to indicate difficult times ahead, investors should stay alert and assess if it can still pay to remain invested.
Harness the power of dividends and compounding1. Make the cash to be saved from your summer getaways and giveaways work harder for your financial goals.
Moreover, investors could also leverage the tools provided by fund management companies to regularly review their investment portfolios and seek professional advice based on their investment objectives and risk appetite.
Diversification does not guarantee investment return and does not eliminate the risk of loss.
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