Management concepts

Prof Lui also said that the recent financial tsunami was not completely a result of inadequate risk assessments by American banks, but also of a knock-on effect, just like the "burning of chained battleships" in the Battle of Red Cliff described in the famous Chinese novel "Romance of the Three Kingdoms". In the battle, Cao Cao had already made risk assessments on possible seasick suffered by his soldiers and taken action to tie all the battleships together to minimise the sway of the ships in the wave. However, he had made a wrong forecast on the direction of the wind that eventually came from the east. If the wind came from other directions, the chained ships would not have caught alight at the same time. Likewise, American banks would normally assess the risk of non-repayment by their clients upon providing housing loans. They would take out insurance with insurance companies to cover the risk. If their clients failed to repay their loans, insurance companies would make compensation accordingly. However, in the recent crisis, since a huge number of non-repayments occurred at the same time, insurance companies subsequently went bankrupt in face of astronomical compensations.

As a matter of fact, no investment is risk-free. Apart from referring to the findings of expert assessments, investors are given the following advice by Prof Lui:

(a) Investment should be diversified. Some people invest their money separately in real estate properties and real estate stocks. Though these investments seem to be diversified, they are actually concentrated as both of them involve the same business.

(b) In investing in stocks, it is important to know about the scale of the company issuing the stocks as large companies normally incur lower risk. The governance of the company should also be taken into account. If a listed company adopts family governance model or the company management was the subject of investigation by authorities, due care and consideration should be exercised before investment is made.

(c) Unidentified investment products should be avoided. Take the "Ponzi Scheme" as an example. It is operated in a way where funds collected are not used for investment but to provide high financial returns for existing investors with a view to encouraging more funds from them and attracting new investors continuously. The swindlers will then flee with all the proceeds when the fruit is ripe.

(d) Unfamiliar investment products should be avoided despite higher returns that might be offered.

(e) Investment disciplines should be established. Don't follow the crowd, as it is usually the end of the wave when everybody follows suit, and that will lead to nothing but investment losses. Moreover, older investors should mainly invest their funds in lower risk investment portfolios.

(f) "Averaging approach" may be considered as an investment option. Under this approach, a certain amount of fund is invested in securities funds on a monthly basis. Its advantage is that more units can be bought while stock prices are low and less will be purchased when stock prices stand high. In the long run, the purchase price of the products invested will be lower on average.

Precision calculation approach

For Mandatory Provident Fund (MPF), if a colleague makes MPF contribution for 30 years since the date he joined the Force until his retirement, assuming an average annual return rate of four per cent and annual salary increment rate of three per cent, the amount of income he can enjoy upon retirement should be close to the sum of his present earnings. However, it should be noted that inflation factors have not been taken into account in this calculation. Therefore, investment portfolios of MPF should be adjusted according to age and the risks affordable at different times. Under the concept of opportunity costs, people of younger age may consider investing in portfolios of higher risk. But as they grow older and the opportunity cost is relatively high, they should adjust their portfolio to a low-risk and stable level since they can no longer afford investment failures at such age.

Since last year, different sectors of the community, inevitably including some police officers, were hit and affected by the financial tsunami. In this connection, the Personnel Services and Staff Relations Branch introduces the Force Caring Series on Financial Tsunami to share some financial management principles on savings, investment and spendings with our colleagues with a view to helping them to cope with their difficulties. In conclusion, there is no "sure-win" tip on investment. The basic principles of smart investment are as follows: have a good understanding of the investment products before making investment decisions; make risk assessments on investment to examine whether the risks are affordable, and never borrow money for investment purposes.