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Wealth Maagemet Educatio Series Navigate the Priciples of Ivestig Maagig your wealth well is like tedig a beautiful formal garde you eed to start with good soil ad a good set of tools. Just as good soil has the proper fertility to ourish a plat, havig the right foudatio i fiacial literacy should empower you to potetially cultivate a successful ivestmet portfolio. Navigatig the Priciples of Ivestig is the first i our fiacial educatio series to help educate you o the fudametals of ivestig as you ted your very ow fiacial garde. 1
Priciples of Ivestig What You Should Kow... Before makig ay of your ivestmet decisios, you should ask yourself what are you ivestig for? What are my eeds ad aspiratios i life? What fiacial goals ad targets do I eed to set to meet those eeds? How do I develop a ivestmet strategy to realize these objectives? Oce you have aswered these questios, you will fid that ivestig your moey accordig to a holistic ad well-developed pla ca be a rewardig experiece. You will better uderstad how your moey is workig for you, ad which decisios are helpig you achieve your fiacial goals ad which are ot. 2 3
Priciples of Ivestig What You Should Kow... To start you off o your fiacial ivestmet jourey, we are pleased to preset six of the key priciples of ivestig*: 1 Assess Your Risk Appetite 2 Diversify Your Ivestmets 3 Determie Your Timig 4 Use Averagig to Your Advatage 5 Start Ivestig Early ad Reivest Your Gais 6 Regularly Review ad Rebalace Your Portfolio Assess Your Risk Appetite Your risk appetite is your tolerace level for positive ad egative fluctuatios withi your portfolio. You eed to determie whether you are comfortable with a fair amout of market volatility, or whether you prefer a calmer ride through less market volatility. You should work with a fiacial advisor to detail your idividual risk profile ad icliatios. Oly the ca you cofidetly focus o ivestmet optios ad strategies that suit your comfort level ad fiacial objectives. * Please ote that these key priciples are ot the oly priciples applicable or relevat to your curret fiacial situatio ad your ivestmet eeds, rather they are some of the most geerally accepted priciples of ivestig that you should cosider whe makig your ow ivestmet decisios. 4 5
Assess Your Risk Appetite Assess Your Risk Appetite Risks versus returs Higher risks do ot automatically traslate ito higher returs. Riskier ivestmets may preset the possibility of superior returs, but higher risks i itself is o guaratee for good performace ad they may i fact result i lower returs ad loss of your iitial ivestmet amout. It is importat to ote that achievig higher ivestmet returs will, i most cases, require you to accept a greater level of risk i your chose portfolio. May paths to success Whe makig your ivestmet decisios, you should ivest at a level ad pace which you are comfortable with. There are may differet ivestmet strategies which you ca choose from to realize your goals. The right ivestmet decisios are the oes which are aliged to your risk profile, which icludes your tolerace of risk. Retur/Risk Map of Selected Idividual Asset Classes Expected Retur (%) 14 12 10 8 6 4 2 Hedge Fuds Global Fuds EM Bods Europe Equity Real Estate AXJ Equity NA Equity 0 5 10 15 20 25 30 Expected Stadard Deviatio (%) Private Equity EM Equity Japa Equity Source: Mercer 2010 Capital Market Assumptios The stadard deviatio of a ivestmet istrumet is ofte used as a idicatio of its iheret risk. 6 7
Diversify Your Ivestmets Here are some ways to diversify effectively Buildig a portfolio across a variety of fiacial istrumets, such as cash, securities or derivatives, that provide exposure to a variety of fiacial markets ad asset classes. Diversify Your Ivestmets You should icorporate a variety of fiacial istrumets i your portfolio whe makig your ivestmet decisios. This way, the uderperformace of ay sigle ivestmet may be offset by gais made o other holdigs. However, you should ote that this iteded offset of losses i particular ivestmets i gais from other ivestmets may ot always be achieved. Types of Fiacial Markets: Capital Market, which icludes the bod market ad stock market Moey Market, which facilitates short term debt fiacig ad capital Derivatives Market, which provides istrumets to help cotrol fiacial risk Foreig Exchage Market Isurace Market Commodity Market Examples of Asset Classes ad their istrumets: Log Term Debt: Bods, Loas Short Term Debt: Treasury Bills ( T-Bills), Time Deposits Equity: Stock, Shares Foreig Exchage: Spot Foreig Exchage : Gold, Rubber, Crude Oil, Natural Gas, Coffee, Soy Beas 8 9
Diversify Your Ivestmets Diversify Your Ivestmets Choosig ivestmets with differet risk levels, as some of these risks may offset each other, ad may help stabilise (or may at least limit losses to) your portfolio performace. Example: Stocks versus Bods Stock prices ted to be volatile, ad divided payouts are cotiget o the compay s performace ad overall market coditios. I cotrast, bod prices are geerally more stable, ad bodholders receive regular iterest paymets. Icludig both stocks ad bods i your portfolio will create a more balaced allocatio ad better riskadjusted retur. Icludig ivestmets i differet idustries i your portfolio. Spreadig your ivestmets across urelated idustries may miimize the impact of idustry-specific risks o your portfolio. It is also useful to bear i mid the followig whe tryig to diversify your portfolio It ca be very costly ad challegig for a idividual ivestor to costruct a properly diversified portfolio o his/her ow. For example, whe seekig diversified equity exposure, a ivestor may eed to buy more tha just a few idividual stocks; which requires a large fiacial commitmet ad may result i sizeable trasactio costs. It is possible to make the mistake of beig overly diversified. While you may be tempted to buy differet stocks, mutual fuds ad/or other istrumets, it ca be overwhelmig to maage ad track the performace of such a large umber of ivestmets. You should therefore cosider more efficiet optios for ivestmet diversificatio. For example, a sigle ivestmet i a idex fud ca give you istat access to a well-diversified basket of idex stocks. 10 11
Diversify Your Ivestmets Best to Worst Performig Asset Classes from 2000 to 2009 Historically, there is o asset class that cosistetly performs best from year to year. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 31.84% 14.02% 25.91% 48.54% 33.17% 21.36% 36.14% 16.23% Log-Term Bods 24.03% High Yield Bods 57.51% 31.04% 12.36% Uhedged Foreig Bods 22.99% 46.03% 22.25% Iteratioal Stocks 14.01% Iteratioal Stocks 26.88% 11.82% Uhedged Foreig Bods 12.00% 37.21% 22.80% Iterm-Term Bods 8.44% Log-Term Bods 16.79% Iteratioal Stocks 39.17% Iteratioal Stocks 20.70% 13.99% 23.48% Iteratioal Stocks 11.62% Short-Term Bods 6.61% 34.47% Log-Term Bods 20.27% Short-Term Bods 8.30% Emergig Market Bods 13.12% 30.03% 16.49% Emergig Market Bods 10.73% 22.21% Uhedged Foreig Bods 10.81% Iterm-Term Bods 5.24% Iteratioal Stocks 32.46% Emergig Market Bods 14.41% High Yield Bods 4.48% Iterm-Term Bods 10.26% 29.75% 14.31% 7.05% 13.35% Log-Term Bods 9.81% 1.80% Emergig Market Bods 28.18% Iterm-Term Bods 11.63% Log-Term Bods 4.21% Short-Term Bods 5.76% High Yield Bods 28.15% Uhedged Foreig Bods 12.04% Log-Term Bods 6.50% High Yield Bods 11.77% Short-Term Bods 7.32% Emergig Market Bods -10.91% 28.60% Short-Term Bods 8.00% 4.09% 3.60% 27.75% Emergig Market Bods 11.73% 5.27% Emergig Market Bods 9.88% 7.04% High Yield Bods -26.39% 20.58% 7.02% Emergig Market Bods 1.36% 1.70% Emergig Market Bods 25.65% High Yield Bods 10.87% 4.70% 9.09% Iterm-Term Bods 6.97% -28.92% 19.69% 5.95% Uhedged Foreig Bods -3.58% High Yield Bods -1.89% 23.93% 9.15% 4.15% Uhedged Foreig Bods 5.94% Emergig Market Bods 6.28% -35.65% 18.91% Uhedged Foreig Bods -2.48% -5.59% -11.42% Uhedged Foreig Bods 18.63% Log-Term Bods 7.70% 3.00% 4.76% 4.74% -36.85 Iterm-Term Bods 5.93% High Yield Bods -5.12% -9.23% -15.52% Iterm-Term Bods 4.10% 6.30% High Yield Bods 2.74% Iterm-Term Bods 4.33% High Yield Bods 2.19% -38.44% Uhedged Foreig Bods 1.90% Iteratioal Stocks -13.95% -19.51% Iteratioal Stocks -15.64% Log-Term Bods 2.48% Iterm-Term Bods 4.34% Iterm-Term Bods 2.43% Short-Term Bods 3.96% -0.17% -38.54% Short-Term Bods 0.78% -22.43% -20.42% -27.89% Short-Term Bods 1.90% 1.24% Short-Term Bods 1.67% 2.07% -9.77% -39.20% 0.16% -22.44% Iteratioal Stocks -21.21% -30.27% 1.07% Short-Term Bods 0.91% Uhedged Foreig Bods -9.24% Log-Term Bods 1.85% -17.88% Iteratioal Stocks -43.38% Log-Term Bods -12.93% Please ote that this is a example oly ad ay potetial returs set out herei are ot idicative of actual returs that may be achieved i ay ivestmets that you may decide to make. 12 13
Diversify Your Ivestmets Determie Your Timig Key represeted by the Citigroup 3-moth T-Bill Idex, a idex of three-moth Treasury bills. represeted by the Dow Joes-UBS Commodity Total Retur Idex, which is composed of futures cotracts o 19 physical commodities. Emergig Market Bods represeted by the JPMorga Emergig Markets Bod Idex Global, which tracks total retur for U.S.-dollardeomited debt istrumets issued by selected emergig market coutries. Uhedged Foreig Bods represeted by the JPMorga No-U.S. Global Govermet Bod (Uhedged) Idex, which is a umaaged market idex represetative of the total retur performace i U.S. dollars o a uhedged basis of major o-u.s. bod markets. High Yield Bods represeted by the Merrill Lych US High Yield Master II Idex, which tracks the performace of below ivestmet grade (BBB), but ot i default, US dollar-deomiated corporate bods publicly issued i the domestic market. Itermediate-Term Bods represeted by the Barclays Capital Aggregate Idex, which is composed of securities from the Barclays Capital Govermet/Credit Bod Idex, Mortgage-Backed Securities Idex, ad Asset-Backed Securities Idex. It is represetative of the domestic, ivestmet-grade, fixed-rate, taxable bod market. Log-Term Bods represeted by the Barclays Capital Log Treasury Idex, a idex of US Treasury obligatios with maturities greater tha 10 years. Short-Term Bods represeted by the Merrill Lych 1 3 Year Treasury Idex, a idex of US Treasury obligatios with maturities from 1 to 2.99 years. represeted by the Wilshire REIT Idex, which tracks publicly-traded Ivestmet Trusts i the US. Iteratioal Stocks represeted by the MSCI EAFE Idex. The Morga Staley Capital Iteratioal (MSCI) Europe, Australasia, Far East Idex (EAFE) is a idex of over 900 compaies, ad is a geerally accepted bechmark for major overseas markets. Stocks represeted by the Russell 1000 Growth Idex, which measures the performace of those Russell 1000 compaies with higher price-to-book ratios ad higher forecasted growth values. Stocks represeted by the Russell 1000 Value Idex, which measures the performace of those Russell 1000 compaies with lower price-to-book ratios ad lower forecasted growth values. Stocks represeted by the Russell 2000 Growth Idex, which measures the performace of those Russell 2000 compaies with higher price-to-book ratios ad higher forecasted growth values. Stocks represeted by the Russell 2000 Value Idex, which measures the performace of those Russell 2000 compaies with lower price-to-book ratios ad lower forecasted growth values. Determie Your Timig There are two ways i which time ca affect your ivestmet returs: 1Time Horizo A ivestmet may fluctuate i the short term, but such volatility may be smoothed out if you hold the ivestmet over a loger time period. A well-maaged portfolio teds to show higher gais over the log term versus the short term. However, eve a well maaged portfolio caot guaratee gais i ay time period. 14 15 16
Determie Your Timig Determie Your Timig Time i the Market 2 Missig the market s best performig days ca have a big impact o your returs: Example of $10,000 ivested i the S&P 500 over a 30-year period from Jauary 1, 1979 to December 31, 2008. All tradig days $93,980 Missig 5 best tradig days $61,211 Buyig low ad sellig high may soud like a good ivestig rule-of-thumb, but if you try to time the market (grabbig the lowest ad highest poits i the market to buy ad sell, respectively) it may lead to risky ivestmet behaviour ad may result i lower tha expected gais or losses to the pricipal amout ivested. It is ot so simple to time the market by buyig low ad sellig high. If you try this, you may ed up doig the opposite (that is, buyig high ad sellig low). Rather, if your ivestmet decisio is to simply buy ad hold o to a ivestmet over a loger time period, you may have the opportuity to receive better ivestmet returs by participatig i the market s best performig cycles (i additio to its worst performig cycles). Missig 10 best tradig days Missig 25 best tradig days Missig 50 best tradig days $9,321 $23,526 0 $20,000 $46,519 $40,000 $60,000 $80,000 $100,000 Please ote that this is a example oly ad ay potetial returs set out herei are ot idicative of actual returs that may be achieved i ay ivestmets that you may decide to make. Missig the 50 best days i the past 30 years would reduce your returs by 90% or close to $85,000. 17 18
Use Averagig to Your Advatage Ivestig oe lump sum versus averagig over time Use Averagig to Your Advatage Dollar Cost Averagig Whe makig your ivestmet decisios, you may be able to save ad accumulate your wealth cosistetly by utilizig the cocept of dollar cost averagig committig to buy a fixed sum of a particular ivestmet o a regular schedule. Whe prices go up, fewer uits will be bought, ad whe prices go dow, more uits will be purchased. The cost of each uit acquired ca the be averaged out over time. I this way, you may be able to build up a desired ivestmet positio by makig a gradual ad disciplied etry ito the market, avoidig the eed to commit the etire capital upfrot, or risk ivestig a large sum at a uexpectedly disadvatageous time. Moth Amout Oe Lump Sum Uit Price Number of Uits 1 $ 20,000 $2.00 10,000 2 3 4 Total $20,000 $2.00 10,000 Moth Amout Averagig Over Time Uit Price Number of Uits 1 $ 5,000 $2.00 2,500 2 $ 5,000 $1.80 2,777 3 $ 5,000 $1.90 2,631 4 $ 5,000 $2.10 2,380 Total $20,000 $1.94 10,288 Dollar cost averagig may be a good way to save ad accumulate your wealth o a disciplied ad regular basis. It may allow you to ride out market volatility ad avoid tryig to time the market. 19 20
Start Ivestig Early ad Reivest Your Gais Start Ivestig Early ad Reivest Your Gais The power of compoudig You may potetially maximize your returs by cosistetly re-ivestig ay gais you receive back ito your ivestmet whe makig your ivestmet decisios. This way, you are cotiuously puttig a larger amout of capital to work, ad your ivestmet retur will be compouded ad may be maximized over time. Utilized properly, compoudig may help you grow a small sum of moey ito a substatial amout over a loger time horizo. Example The power of compoudig is illustrated by the example below, based o a rate of retur of 10% per aum. I both examples, Joh ad Paul, both the same age, each ivest $1,000 per aum, but Joh starts ivestig at age 20 ad for just 10 years, while Paul starts 10 years later at age 30, ad ivests for 20 years. Whe they are both 49, Joh will have sigificatly more moey at tha Paul*. 21 22
Start Ivestig Early ad Reivest Your Gais Start Ivestig Early ad Reivest Your Gais The power of compoudig (Joh versus Paul) Year-Ed Value $120,000 $100,000 Joh s Year-Ed Value Joh s Total Ivestmet = $10,000 ($1,000 per year) Joh s Ivestmet value at age 49 = $117,941 $80,000 Paul s Year-Ed Value Paul s Total Ivestmet = $20,000 ($1,000 per year) $60,000 Paul s Ivestmet value at age 49 = $63,002 $40,000 $20,000 0 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 Age * Please ote that this is a example oly ad ay potetial returs set out herei are ot idicative of actual returs that may be achieved i ay ivestmets that you may decide to make. 23 24
Regularly Review ad Rebalace Your Portfolio Regularly Review ad Rebalace Your Portfolio Keepig i good shape As part of your process i makig your ivestmet decisios, you should keep i mid the evaluatio ad fie-tuig of your ivestmet portfolio at regularly scheduled reviews. This evaluatio ad fie-tuig may help to esure your portfolio cotiues to be aliged with your desired risk-retur profile, ad that it is wellpositioed to achieve your target performace. At each review, ask yourself if your persoal ad fiacial situatios have chaged, ad whether the ivestmet performace of your portfolio has affected your goals. Whe moitorig your ivestmet performace, resist makig impulse drive chages i respose to short-term market fluctuatios (ad icur trasactio costs i the process). Istead, keep i mid the ivestmet goal ad time horizo you have set for yourself, before decidig if there is a real eed to rebalace ad re-adjust your portfolio ivestmets. The professioal services of a fiacial advisor ca be most valuable i this regard. He or she will be able to moitor your ivestmets, help you uderstad if your portfolio is performig to expectatios, idetify ew ivestmet opportuities, ad recommed portfolio adjustmets where ecessary. 25 26
Importat Iformatio Stadard Chartered Bak (SCB) is icorporated i Eglad with limited liability by Royal Charter i 1853 Referece Number ZC 18 ad its pricipal office is situated i Eglad at 1 Basighall Aveue, Lodo, EC2V 5DD. I the Uited Kigdom, SCB is authorised by the Prudetial Regulatio Authority ad regulated by the Fiacial Coduct Authority ad Prudetial Regulatio Authority. Bakig services may be carried out iteratioally by differet SCB legal etities accordig to local regulatory requiremets. Not all products ad services are provided by all SCB braches, subsidiaries ad affiliates. Notes The material ad iformatio cotaied i this documet is provided from sources believed to be reliable ad is for geeral iformatio oly. The products ad strategies coveyed may ot be suitable for everyoe ad should ot be used as a basis for makig busiess decisios. Opiios expressed i this documet are subject to chage without otice. This documet does ot costitute a offer, solicitatio or ivitatio to trasact busiess i ay coutry where the marketig or sale of these products ad services would ot be permitted uder local laws. The cotets of this documet have ot bee reviewed by ay regulatory authority. If you are i doubt about ay of the cotets, you should seek idepedet professioal advice. No part of this documet may be reproduced i ay maer without the writte permissio of SCB. 27 28
Notes 29