The well-known proverb, "Don't put all of your eggs in one basket." indicates that investing in a range of equities can help spread investment risk. However, local investors are limited to investing in the Hong Kong stock market and diversification of risk could be ineffective when the market is down or is facing systematic risk, such as during the 1997 Asia financial crisis.
Investment funds can offset this limitation by offering investment opportunities in different regions and asset classes. With investment funds, investors can diversify risk as well as participate in the uptrend of different regional economic cycles or asset classes. Several examples illustrate this advantage. Investment grade bonds surge when stock markets plunge. When the Asian markets were falling, the European as well as the US markets were rising. When USD asset classes were weak, commodities were strong. When the technology sector was bearish, the real property market was bullish, which happened both in the European and US markets at the time the technology bubble burst in 2000. Hedge funds can gain as geopolitical risk increases, while long equity positions would display uncertainty during such times.
The table has turned again and again. No market or asset class is either outstanding or underperforms all of the time. By investing funds in different markets and asset classes, one can reduce the risk of a single market crashing, as well as participate in the uptrend experienced in different asset classes.
The Hong Kong stock market goes up and down, and the latest bullish market is regarded as occurring in 2003. The stock market reached a climax under Chinese concept stocks in 2006 and investors could easily pick a winning stock. In-depth look at the returns of the past 10 years, however, it won't got 4% under the total return of around 40%.
Meanwhile, funds can help you to participate in the uptrend of different markets and asset classes, allowing you to earn more than the 40% gain in the Hong Kong market.
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