I. Stocks and Bonds: Unveiling the Investment Giants

Definition and Characteristics: Decoding the DNA of Stocks and Bonds

Stocks and bonds are key players in long-term investing, each with distinct characteristics. Stocks, or equities, represent ownership in a company, offering potential long-term returns through capital appreciation and dividends. Bonds, on the other hand, are debt instruments issued by governments or corporations, providing regular interest payments and long-term returns of principal at maturity.

Battle of Returns and Risks: Which Investment Takes the Crown?

To determine the superior investment choice, one must evaluate the battle between returns and risks offered by stocks and bonds. Stocks provide the potential for higher returns but come with greater volatility. Bonds offer a more stable income stream. Balancing desired returns and risk tolerance is crucial.

Seeking guidance from a fiduciary advisor experienced in financial and repatriation planning can help investors navigate this battle, ensuring an investment strategy that aligns with their goals and risk appetite. More on this to come.

It is often perceived that age often plays a significant role in determining risk tolerance when investing in stocks or bonds. Younger individuals with a longer investment horizon may be more inclined to take on the higher risks associated with stocks, aiming for long-term growth as younger individuals can ‘ride’ the ups and downs of the stock market. Conversely, older individuals nearing retirement may prioritise capital preservation and opt for the relative stability of bonds to safeguard their accumulated wealth.

Stocks vs Bonds aren’t the only thing people are investing in these days. Stay tuned for more information on how alternative investments such as property, cryptocurrency and even postal stamps can be in your portfolio.

II. Riding the Stock Rollercoaster: Profits and Peril

Historical Performance: Unveiling the Power of Stocks

Examining the historical performance of stocks provides valuable insights into their potential as investment vehicles. Over time, stocks have demonstrated the ability to generate substantial returns, outperforming many other asset classes. For example, $100 invested in the S&P 500 in 1928 would have been worth more than US$780,000 in 2023. Compare this with the US Treasury Bond in the same time period, it would be worth just over US$7,000.

By analysing past trends, investors can better understand the long-term growth potential, capital appreciation, and dividend income associated with stock investments.

However, it’s important to note that historical performance does not guarantee future results, and a good understanding is essential for informed investment decisions when creating a well-rounded investment portfolio.

Volatility and Market Mayhem: Surviving the Stock Market Storm

Surviving the stock market’s volatility and capturing high returns requires a long-term investment approach. While short-term fluctuations can lead to losses, investing for the long term allows investors to weather the storm of market volatility.

Using the same data as the example above, compared to longer terms, the S&P 500 is much more volatile over any given 12-month period. That implies that should you decide to sell, you run a higher chance of losing money over a year. Economic recessions are usually preceded by and accompanied by sharp drops in stock prices. If you time the market incorrectly, your losses may be severe.

You’ll be more likely to profit if you extend the holding period from a year to five years. There were very few five-year periods between 1945 and 1995 when the S&P 500 would have lost money. Even better results were obtained after a 10-year holding period, with an average return of roughly 13% and no negative returns. Therefore, your chances of making money increase with the length of the holding period.

Historical data shows that over many decades, treasury bonds rose in 76 years compared to stocks rising in 69 years from 1928 to 2021. Despite short-term volatility, the stock market has rewarded investors with higher returns than the bond market over the long term.

III. Bond Bonanza: Income and Stability

Coupon Payments and Principle Repayment: The Sweet Sound of Bonds

Bonds or fixed income, offer investors a reliable source of income and stability. They are known as fixed income because it pays a fixed interest rate to investors, also known as coupon payments. Coupon payments are regular interest payments made to bondholders, providing a steady income stream over the life of the bond.

Additionally, investors are repaid the principle amount they had invested. This means your total principle amount when you bought your bond initially, is paid when the bond ‘matures’.

Steady as a Rock: Riding the Stability Train with Bonds

When seeking stability in an investment portfolio, bonds are like a steady anchor. Bonds offer investors a reliable source of income and stability. Unlike stocks, which can experience significant price fluctuations, bonds tend to be more stable in value.

This stability is due to their fixed interest payments, and the return of the principal amount when the bond matures. The predictable income stream and the repayment of the initial investment make bonds an attractive option for risk-averse investors looking for stability and a steady ride in their portfolio.

Take note of the different bond issuers, from government-issued bonds to corporate bonds as they may have different credit ratings. Typically, the higher credit rated bonds are usually government bonds, as they typically don’t default on the bond, whereas smaller companies, may have a lower credit rating meaning there is a higher risk the bond won’t pay out the interest or your initial payment.

 

IV. The Art of Balance: Diversification and Portfolio Magic

Dance of the Investment Titans: Balancing Stocks and Bonds

Achieving a well-diversified investment portfolio necessitates adeptly managing the equilibrium between stocks and bonds. Stocks present opportunities for growth and potentially higher returns, yet their inherent volatility demands caution. Conversely, bonds offer stability and a dependable income stream, albeit with more modest returns. By skillfully diversifying holdings between stocks and bonds, investors can harness the advantages offered by both asset classes.

For example, if you hold 60% of stocks in your portfolio, and the stock market returned 10% in one year, your portfolio would be up 6%, with all other things being equal (ceteris paribus). Whilst if the following year the stock market returned -10%, your portfolio would only be down -6%. For more in-depth research on the split of stocks vs bonds, check out our rebalance article here.

For more in-depth research on the split of stocks vs bonds, check out our rebalance article here.

Making informed investment decisions and understanding your risk appetite will help make better investment decisions for your desired financial goals. How much risk can you handle? This ties in nicely when we previously mentioned taking into account a long-term view when weathering the stock market storm.

 

V. Tax Tricks and Treats: Maximise Returns, Minimise Obligations

Tax Implications of Stock Investments: Navigating the Tax Maze

When venturing into stock investments, understanding the associated tax implications is crucial to optimise returns while minimising obligations.

Various tax rules and regulations govern the taxation of stock investments and vary from country. These include capital gains taxes (CGT) and dividend taxes. Capital gains are typically taxed when stocks are sold at a profit, while dividends received from stocks may also be subject to taxation.

In Hong Kong, there is no capital gains tax on the sale of stocks, allowing individuals and corporations to enjoy tax-free profits. When buying or selling stocks in Hong Kong, a stamp duty is imposed. Stamp duty on Hong Kong stocks of 0.1% is imposed on stock transactions. Additionally, dividends received from Hong Kong stocks are generally not taxed, although investors should consider potential taxes in their home country.

Stay tuned as next month we talk about the difference when it comes to funds and where they are listed, does it affect you?

Bond Taxes Unveiled: Keeping More of Your Hard-Earned Returns

Understanding the tax implications of bond investments is essential for maximizing returns and retaining a greater portion of your hard-earned income. When it comes to bonds, different tax rules apply to various types of bonds, such as government bonds, and corporate bonds.

While interest earned from government bonds issued by the Hong Kong Special Administrative Region (HKSAR) government is typically exempt from tax, bonds issued by other entities may be subject to tax on their interest income which may be included in the individual’s or corporation’s assessable income for the relevant tax year.

It’s advisable to consult with a tax professional to understand the specific tax regulations and any updates to the tax laws in Hong Kong.

 

Conclusion

Unravelling your investment goals is essential in finding your investment soul mate. Define your financial ambitions by reflecting on your short-term and long-term objectives. Are you aiming for capital growth, generating a steady income, or preserving wealth? Clarifying your goals will guide your investment decisions and help determine the appropriate allocation between riskier assets like stocks, suited for growth-oriented goals, and more stable options like bonds, ideal for income preservation or risk mitigation objectives. By decoding your investment goals, you can tailor your portfolio to align with your financial aspirations and pave the way towards long-term success.

Check out our other articles on creating a long-term financial plan and budgeting in Hong Kong.