4 MPF Mistakes to Avoid

Mistake 1: Having one fund (or one market) for all MPF assets.

China/Hong Kong stock funds have traditionally been favourites for Hong Kong workers. The impressive gains in some years like 2017 and 2020 seem to have validated many investors idea that all they need for growth is this one fund/market.

However, there are downsides to having a concentrated portfolio. A diversified portfolio reduces volatility and limits losses. While 2020 saw gains, 2021 saw corrections. If your portfolio had equities in both China and other markets, you could have enjoyed some cushion against the country-specific risks caused by regulatory changes.

Remember though, that because of the way the MPF scheme is structured, it is inherently concentrated. MPF schemes have a narrow set of asset classes from which to choose. For example, you cannot hold MPF assets in cash, only in liquid money-market funds, which charge fees. More risky asset classes like frontier market equities are also excluded. Funds also face strict restrictions in the weighting allocated to China A-shares.

So, when seeking diversification, it is important to diversify both your MPF portfolio, and also your investments outside of the scheme.

Mistake 2: Adjusting your portfolio based on news.

Remember, it is hard for us individual investors to time news and economic data accurately. For example, when the official census department made the announcement, the data point – of the previous quarter-end, for example – would have been well behind us. Trading on that dated information would put you on the backfoot.

Second, MPF transactions are based on ‘forward pricing’. That means, when subscribing or redeeming a fund, the trading price of that fund unit is calculated based on the net asset value of the fund when the market closes for the day. The last available price known at the time when the decision is made can differ from the final execution price. This pricing mechanism makes day-trading MPF funds an unsuited strategy to reflect short-term views.

Lastly, it is documented that timing the market rarely affords better returns. The key to investment success is time in the market, not timing the market.

Mistake 3: Only checking your portfolio when markets correct.

When the market corrects, the first thing to do is do nothing. Changing fund holdings in the middle of a market correction would mean taking your losses right away, and more importantly, missing out on the opportunities to recover.

Instead, a more reasonable way is to focus on your time horizon (in the case of MPFs, it could be as long as decades), your financial goals, and your risk appetite and risk tolerance. Once you centre that, ignore the noise.

Regular portfolio checks and rebalances is crucial. What happened with the Chinese companies in the past month would be a testimony of the importance of rebalancing. Say, your portfolio invests in two funds – China equity and Global Bond – in a 60/40 split initially. If you bought and held your MPFs through 2019 and 2020, you would have reaped a handsome gain from it and relatively little from the bond part. Subsequently, at the end of 2020, your portfolio would have drifted away from your initial 60/40 level, and would skew higher to equities. As a result, in 2021’s correction, your portfolio could have suffered undesirably high exposure to China equity’s downside risk.

Mistake 4: Not starting immediately.

The earlier you start investing, the longer your investment will compound (your money will grow exponentially). Then, define the portfolio characteristics and risk profile that you are targeting. In the context of MPF, the investment horizon spans as many as 40 years until the statuary retirement age before we can withdraw a single penny from there.

The age-based approach is a common starting point if you are unsure of the mix between stock and bond. Some people call it the 100 Minus Your Age method, which is effectively an advanced method of the 60/40 constant-mix allocation. Using 100 as a starting point, the weighing in percentage equivalent to your age goes to bond and the remainder in stocks. The tenet is to peg your age to the risk tolerance level, as younger workers can afford to take a bigger portion of their pension assets into (relatively riskier) equities. As investors get older, their time horizons shorten, making an increasing fixed-income allocation more prudent.

With diminishing pensions and growing life expectancy, taking 120 as the starting line has become more mainstream. As one can imagine, a young individual with an overly conservative portfolio may end up outliving the retirement pot, adding to the fact that the yields earned in bonds nowadays are low.

Amy Arnott, a portfolio strategist a Morningstar, says this rule is time-tested, simple and intuitive. She explains: “There’s a strong link between life expectancy and investment time horizon, since a portfolio only has to last long enough to sustain a person during his or her natural life, unless someone wants to set aside money for bequests after death.” Linking portfolio allocations to age might lessen the temptation to engage in market-timing (making dramatic allocation shifts in response to market moves). 

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