Inflation Risk

Inflation could erode the purchasing power or the real value of your investments. The following table shows the effect of inflation on purchasing power in Hong Kong between 1990 and 2000 - an item costed $100 in early 1990 would have costed $172 in the last quater of 2000.

Inflation Risk
Source: Hong Kong Census & Statistics Department

Investment Risk

This concerns the possibility that the future value of your investment can go down. The following table shows that the possibility of incurring capital loss is higher for equities when comparing to bonds and cash. At the same time, equities also show a higher possibility of making capital gains especially in the long term.

Investment Risk

Hang Seng Index Hang Seng Index
3-Month HIBOR 3-Month HIBOR
Hong Kong Consumer Price Index (A) Hong Kong Consumer Price Index (A)
World Government 5-7 years' US$ Bond Index World Government 5-7 years' US$ Bond Index

Source : Datastream, Hong Kong Census & Statistics Department and Salmon Smith Barney

*The data are shown in the form of indices. For the first quarter of 1990, all the indices are set at 100.

Inflation risk and investment risk are not the same

Cash involves little investment risk but historically the return generated by cash is the lowest compared with that of equities and bonds. In the long term, cash deposit can expose your asset to the greatest inflation risk.

On the other hand, stocks carry higher investment risk. Stock prices could fluctuate a lot and in the short term investors could incur capital loss on stock investments. However, stocks have historically provided the greatest return when compared with that of bonds and cash.

Long Term Return Investment Risk Inflation Risk
Equities High High Low
Bonds Medium Medium Medium
Cash Low Low High

Investment involves risks and the prices of units may go down as well as up. Past performance is not indicative of future returns. Please refer to the Explanatory Memorandum for further details.

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