How does MPF work as an asset-allocation platform?

Adapted from reporting originally published in March 2012.

2011’s market turmoil dented MPF returns; the early-2012 rebound repaired them. The lesson drawn at the time was timeless: how does MPF work best? As a long-horizon platform for practising asset allocation — spreading money systematically across equities, bonds and cash to match age, time horizon and risk tolerance.

How should savers set their asset allocation?

Look beyond age to life stage, family and career circumstances. A single thirty-something earning HK$25,000 a month can stomach more risk than a same-aged peer with two young children. Higher risk tolerance points toward equity funds; lower tolerance toward bond or conservative funds. Time is the allocator’s ally — the longer the horizon, the better it absorbs short-term swings.

How often should the allocation be reviewed?

Review the portfolio every six to twelve months and rebalance back to target weights. If life hasn’t materially changed, the job is simply rebalancing — trimming whatever has run ahead, such as equities after a strong year. Avoid frequent switching on short-term market moves: panic selling locks in losses and can mean missing the rebound.

Why is MPF suited to asset allocation?

MPF’s monthly contributions and lock-in until 65 naturally suit dollar-cost averaging and long-term investing. Buying a fixed amount each month — fewer units when prices rise, more when they fall — smooths the average cost. The technique isn’t reserved for fund managers; with the basics, any member can apply it. An insurer’s distribution chief made the case in a 2012 column.