A sound MPF investment attitude (I): dollar-cost averaging plus compounding

This article is a rewrite of a report from August 2012.

Long-term investing and diversification sound easy and prove hard. For young starters, MPF may be their first-ever investment. An AXA insurance executive wrote then on how the MPF system helps members practise both — this is the first instalment.

How does MPF enforce long-term investing?

The system stops you fiddling. Employers and employees must contribute on schedule whatever the market does; contributions buy funds per your mandate and can’t be cashed out at will. Buying assets at prevailing prices on a fixed schedule, regardless of conditions, is dollar-cost averaging.

Everyday investors break regular investing to meet spending needs or lock in gains; MPF’s structure enforces persistence for you.

What’s the advantage of dollar-cost averaging?

Fewer units when prices are high, more when they’re low. A fixed sum buys fewer units as prices rise and more as they fall — cushioning volatility over time. It suits novices especially: no need to watch markets daily; set goals and amounts, review periodically, and you’re done.

How powerful is compounding?

Time is money. Monthly contributions keep growing the principal while earned returns keep rolling over — the compound effect. Example: a 21-year-old earning HK$6,500, with HK$650 in combined monthly contributions and 5% annual returns, would hold over HK$1.25 million at 65.

MPF returns come not from market timing but from time in the market: like a marathon, it’s endurance, not sprinting, that counts.