Weathering three market storms: what MPF fund performance data from 2011 says about long-term investing

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

Europe’s debt crisis unsettled global markets in early 2012, but MPF members had little reason to panic. MPFA data as of end-September 2011 showed the MPF system had already weathered three stock market crises since its December 2000 launch — the 2001 dotcom bust, SARS in 2003 and the 2008 financial tsunami — stabilising after each storm. The numbers tell the story of MPF fund performance built to endure.

Why is MPF described as able to weather market storms?

MPF is described as storm-proof because the data shows it survived three major crashes. According to the MPFA, the system’s annualised internal rate of return from December 2000 to end-September 2011 was 2 per cent, above the 0.8 per cent annualised change in the Composite CPI over the same period — in other words, it beat inflation, and every approved constituent fund type posted a positive annualised return. Lipper data showed average total returns of 76.89 per cent for equity funds and 137.63 per cent for Hong Kong equity funds between end-2001 and end-2011.

How did MPF equity funds recover from crashes within a few years?

Dollar-cost averaging is how MPF equity funds recovered from crashes within a few years. MPF invests a fixed sum at regular intervals through monthly contributions: more units are bought when prices are low, fewer when prices are high, averaging the purchase price over the contribution period and dampening risk. Combined with the compounding of long-term regular contributions, this let some equity funds swing from loss to profit within just two or three years of a crisis.

What is the biggest mistake members make when MPF loses money?

The biggest mistake is treating MPF like a trading account. Some members fixate on short-term fund performance and switch funds frequently as markets swing — but MPF is a long-term retirement investment and a key income source after retirement. Current price moves affect only short-term paper gains and losses. Members should align their strategy with their life stage and risk tolerance, and review their retirement portfolio regularly, rather than chase market noise. The MPF education hub has more on long-term strategy.