Financial planning is a hot topic in the society; does everyone need to have his or her own financial plans? Someone deposit his wages in banks, not only have interest, but also prevent the money from theft. However, we cannot elude an invisible theft "Inflation".

• "Inflation" is the decreasing purchasing power of money. When inflation rate is higher than interest rate of your deposit, your money is shrinking in value.
• Someone depends on the saving in bank for his future economic objective will become futility, because the interest for bank deposit is too low. For example, if we intend to save HK$700,000 for our child to study in the United States, HK$5,000 per month ought to be enough and the target ought to be achieved after 12 years. Nevertheless, according to statistics, the average inflation rate in the United States is over 12% each year. Our target seems impossible to be achieved unless we invest our money for a higher return than the inflation.

Risk is the possibility of loss due to the uncertainty associated with the end of period value of the investment. Return is the compensation over the principal of our investment.

General speaking, there is a direct proportion between risk and return. That means, the higher the return, the higher risk an investor should be accepted, and vice versa. The investment with higher risk requires longer time horizon to bring the probable higher return into full play. Among equities, bonds and money market instruments, the probable return of equities is the highest with the highest risk; it is suitable for investors for long-term capital gain.

Some investments are classified as risk-free, such as U.S. Treasury Bills, Hong Kong Exchange Fund Bills. There is risk-free return for the time value of money.

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Inflation is an invisible theft, which not only eroding our purchasing power, but also reducing our investment return.

Risk and return will fluctuate in different economic cycle and time period, how can we get a stable capital gain in such circumstances. Dollar Cost Averaging is a strategy of regular contribution for buying and holding the assets, so that to obtain a long-term capital gain.

• Do not need to time the market;
• Averaging the up and down of market price;
• Averaging the long-term cost of investment.

Compound interest is the process of rollover of principal plus interest, investor may obtain large return after a long term. The longer the time period of rollover, the bigger is the power of compound interest.

Albert Einstein had said that the power of compound interest greater than atom bomb.

David Bach, a famous American financial consultant, said in his book "Smart Couples Finish Rich" that did not overestimate how much you could earn in one year and did not underestimate the amount rollover after 20 years..

Active Investment Strategy can be applied by those who have the ability to analyze the move of the market. When they have confidence that the price will be up, they can invest a lump sum into the assets.

Passive Investment Strategy can be applied by those who have not the ability to analyze the move of the market. They can imitate an investment portfolio similar to some benchmark (e.g. Hang Seng Index constituent stock), contribute regularly to the portfolio, and may earn a compound return through dollar cost averaging.

"Don't put all the eggs in one basket" is a famous dictum. There was such dialog in William Shakespeare's book "Merchant of Venice": "My ventures are not in one bottom trusted, nor to one place; nor is my whole estate."

Diversification means owning different issues of the same asset class or different asset classes within a portfolio of investment, or investing in different markets, regions or countries. Investor can reduce the risk with certain expected return through diversification, because a market fluctuation may have different effect on investment vehicles, the price of equities and bonds may move in opposite direction. In theory, the largest number of investment vehicles included in one portfolio and the less is the coefficient co-relation among the vehicles, the better is the effect of diversification.

Time not only works for investors through the power of compounding, but also helps to dampen the risk of investments. For example, investors have chances to gain a large profit during the interim fluctuation, but also have chances to loss all their money. If they hold the equities for a longer time, the price may return or even over the original price. The chart below shows the upward trend of the stock market from 1964-2001.

There are different ability of accumulation of wealth, life style, consuming habit and individual economic objective in different stage of life cycle, so that the objective of investment will be different.

Economy will to take place by turns between prosperity and recession, however, there is no standard time span.