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STUDENT No: 107011346

Project submitted in partial fulfillment

Of the requirements of the

BA (Hons) FINANCE and INVESTMENT MANAGEMENT

of Northumbria University

NAME YUEN Wing Tung

DEGREE BA (Hons) Finance and Investment

Management

TUTOR

TITLE

Mr. Cy Chan

The Choices of Investment Products

under the Time of Inflation

DATE 8 April 2011

CAMPUS IVE (Chan Wan, Hong Kong)

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Declaration and Word Count I declare the following:-

(1) that the material contained in this Project is the end result of my own

work and that due acknowledgement has been given in the bibliography

and references to ALL sources be they printed, electronic or personal.

(2) the Word Count of this Project is: Part A: 4172 Part B: 5667

(3) that unless this Project has been confirmed as confidential, I agree to

an entire electronic copy or sections of the Project to being placed on

Blackboard, if deemed appropriate, to allow future students the

opportunity to see examples of past Projects, I understand that if

displayed on Blackboard it would be made available for no longer than

five years and that students would be able to print off copies or

download, the authorship would remain anonymous.

(4) I agree to my Project being submitted to a plagiarism detection service,

where it will be stored in a database and compared against work

submitted from this or any other School or from other institutions using

the service.

In the event of the service detecting a high degree of similarity between

content within the service this will be reported back to my supervisor

and second marker, who may decide to undertake further investigation

which ultimately lead to disciplinary actions, should instances of

plagiarism be detected.

(5) I have read the University Policy Statement on Ethics in Research and

Consultancy and the Policy for Informed Consent in Research and

Consultancy and I declare that ethical issues have been considered and

taken into account in this research.

SIGNED:

DATE:

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Abstract

There are many different learning styles and everyone has the unique

learning style which might more than one. People should know the

importance of identifying their own learning style since it would affect the

way they learn as a student, but more importantly, it would affect the way

they work as an employee which is crucial to get survive and success in the

career path. In part A, the author had done the four popular instruments of

learning preference and they are VARK questionnaires, Learning

Style-Perception Inventory. The preferred learning preferences, strengths

and weaknesses of the author were found by completing the above tests

and questionnaires. According to the results received from the four

instruments, the outcome is supporting that the author is applicable to

initiate her career in finance industry. The part B in this dissertation is going

to further study the finance industry which related to the author’s career

choice. Inflation is an economic problem that everyone concerns, so having

a good cognition in inflation is crucial as the author wants to be a wealth

management advisor. The author investigated the overview of inflation and

how is the inflation affecting the economy and individuals. She also

examined the issues arose from the inflation and making the proper

investment choices recommendation out of the addressed three inflation

issues.

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Acknowledgements

The author would like to thank the her lecturer for teaching how to put all

together as a professional project and also her supervisor who is giving the

advise and comment to the author and taught her how to put this whole

project through.

For the classmates in university, the author would like to appreciate them

all when they assisted the author to figure out some questions and difficulty

in the conduction of this dissertation.

Last but not least, the author knows that she cannot finish this whole

project without the supporting and encouragement from her family and the

friends, so here is the greatest thankful to my family and dearest friends.

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Table of Contents Title Page …………………………………………………………….……….. 1

Declaration and Word Count …………………………...……………….. 2

Abstract ……………………………………………………….………………3

Acknowledgements…………………………………………………………….4

Table of Contents …………………………………………………….………. 5

Part A …………………..…………………………….…….………….…........ 8

Who am I as a Learner ? ………………………….………………..……….. 8

1. Introduction …………………………………..……….…………….…..….. 9

2. Learning Style Instruments ……………………………..………………. 10

2.1 VARK ……………………………………………..……….…………... 10

2.2 Learning Style Questionnaire (LSQ) ………...………………..….. 11

2.3 Myers- Briggs Type Indicator (MBTI) …………………….…………13

2.4 Belbin Team-Roles Self-perception Inventory ……...……………. 15

3. Area of Strengths …………………….…………………………………. 16

3.1 Good in Organizational Skill ………………………………………. 17

3.2 Good Interpersonal and Communication Skill ….…..……...……… 17

3.3 Detailed-Oriented …………………….……………….…………….. 17

3.4 Thoughtfulness ………………..……………………….……………. 18

4. Area of Weaknesses ………….………………………….…………….. 18

4.1 Lack of Flexibility ………………………..…………….…………….. 18

4.2 Lack of Creativity ……………………………………………….…… 19

4.3 Perfectionism …………………………………………………………19

Implication for Career Choice ……………..……….………………………. 20

5. Implication for The Author’s Career Choice …….……………………. 20

6. Lifelong Learning ………………………….…………………………….. 21

6.1 Short Term ………………………………………………….……..…. 22

6.2 Long Term ……………………………………….……………………. 23

7. Transferrable Skills ……….……………………….……………………. 24

7.1 Critical Thinking Skill …..…………….…….…..…………………… 24

7.2 Leadership Skill ……….….…………………………………………. 25

7.3 Organizational Skill …………………………………………………. 25

8. Justify Chosen Career Choice ……..………………………………….. 26

9. Conclusion ………………………………………………………………. 27

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Part B …………………………………………………………………………..29

1. Introduction…………………………………………………………………29

1.1 Reason of Choice of Topic…………………………………………….29

1.2 Academic Objective of Project………………………………………..30

1.3 Outline of Sections………………………………………………….....32

Literature Review……………………………………………...……………….33

2. What is Inflation?..................................................................................33

2.1 Effect of Inflation (For the Economy)…………………………………34

2.2 Effect of Inflation (For the Individual)……………………...…………36

3. The Three Inflation Issues……………………………….………………..37

3.1 The Most Appropriate Inflation Measure to Calculate the Return

After Inflation……………………………………………………………38

3.2 The Best Assumption for the Inflation Future Rate for the

Investors.........................................................................................38

3.3 The Implications for Financial Return and Investment Decisions with

respect Asset Allocation for Investor in the light of Inflation

Prospect………………………………………………………………...39

4. Recommended Investment Products…………………………………….40

4.1 Commodity……………………………………………………………40

4.2 Exchanged Traded Funds (ETFs)…………………………………..42

4.2.1 Inflation Indexed Bonds (ILBs)…………………………..…..42

4.2.2 Real Return Funds……………………………………………43

4.2.3 Precious Metals………………………………………………..44

4.3 Real Estate Investment Trusts (REITs)……………………………..45

4.4 Stocks…………………………………………………………………..46

5. Summary and Conclusion……………………………………………….50

References …………………………………………………………………….53

Bibliography ……………………………………………………………………66

Appendix A – Reflective Statement…………………………………………..71

Appendix B – VARK …………………………………………………………..75

Appendix C – Learning Style Questionnaire (LSQ) ……………………….76

Appendix D – Myers-Briggs Type Indicator (MBTI) ………………………..77

Appendix E – Belbin Team-Roles Self Perception Inventor ……………….81

Appendix F – First Job Advertisement……………………………………….85

Appendix G – Second Job Advertisement…………………………………...87

Appendix H – Application Letter for First Job Advertisement………………89

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Appendix I – Presentation PowerPoint………………………………………91

Last Page………………………………………………………………………92

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Part A

Who am I as a Learner?

1. Introduction

Every day the people lived, every day the people learned. Learning is

related to people’s life. They might be born with nothing except the body

but the very first thing to do is learning. Person survives in this world and

reaching satisfaction by learning. People who understand and then are

provided opportunities to make use of their learning styles tend to feel

valued, respected, and empowered (Carbo and Hodges 1988).

Everyone has unique learning style preference. Learning styles is the

composite of characteristic cognitive, affective, and physiological factors

(See figure 1.1) that serve as relatively stable indicators of how a learner

perceives, interacts with, and responds to the learning environment (Keefe

1979) and Stewart and Felicetti (1992) define learning styles as those

"educational conditions under which a student is most likely to learn."

Therefore, learning style is not really referring to what to learn but how to

learn.

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Figure A 1.1: Learning styles – The three factors

Cognitive The information processing habits of an individual.

These represent a person's typical modes of

perceiving, thinking, remembering, and problem solving

(Keefe, 1991).

Affective It includes personality and emotional characteristics

related to the areas of persistence, responsibility,

motivation and peer interaction (Reiff, 1992).

Physiological It is biologically based modes of response that are

founded on sex-related differences, personal nutrition

and health, and reactions to the physical environment

(Keefe, 1991).

Sources: Karen Hood (2000)

Price (1977) stated “students learn differently from each other.” It is

important for an individual to identify their own learning style because it

improves achievement and motivation when people using preferred

learning style. Kaminski, J. (1999) mention that “learners process

information and knowledge more efficiently if given the opportunity to use

their preferred methods of learning within the educational environment.”

People should realize how important that issue is since they would not stop

learning even they are not student anymore. In this changing world, people

need to learn continuously if they want to survive and synchronized with the

world.

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Learning styles are determined by the combination of how one

perceives and processes information (Kolb, 1983). As a learner, the author

had done four learning style instruments which are popular and in

widespread use, in the cause of finding the most suitable learning style that

the author preferred to acquire and organize the information. The four

learning style instruments are VARK questionnaire, Learning Style

Questionnaire (LSQ), Myers-Briggs Type Indicator (MBTI) and Belbin

Team-Roles Self Perception Inventory.

2. Learning Style Instruments

This section presents the implication of the result the author got from

each questionnaires and the information that assist her to identify the way

she will learn best.

2.1 VARK

VARK launched in 1987 and it is created by Neil Fleming and Charles

C. Bonwellis. VARK is a learning style inventory for people to find out their

own learning preference. By knowing their own learning style, it helps them

to assimilate and bring out information more efficiently and understand the

people around them. Fleming & Mills (1992) claimed “Students can also

use the model to identify their preferred learning style and maximize their

educational experience by focusing on what benefits them the most.” They

can understand their unique learning preference through four categories:

Visual, Aural/ Auditory, Real/ Write, Kinesthetic (Fleming & Mills, 1992).

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2.1.1 Implication on Learning

As an outcome of VARK (See figure A 2.1 & Appendix A), it shows that

the author tends to be learning best in the Aural and Kinesthetic learning

styles. For the Aural category, she would learn best from hearing and

speaking such as to sort things out via discussion with her friends,

classmates. For Kinesthetic category, she learns things through the use of

experience and practice. Substantial materials make her learning more

efficiently and it would bring up the morale to learn. Fleming and Mills (1992)

mentioned “…either through concrete personal experiences, examples,

practice or simulation.”

Figure A2.1: VARK Learning Mode – Result

2.2 Learning Style Questionnaire (LSQ)

Honey and Mumford’s Learning Style Model established by Peter

Honey and Alan Mumford in 1982-1983. It is directly adapted from David

Kolb's Experiential Learning Theory (Kolb, 1975). Kolb (1984) believes

“learning is the process whereby knowledge is created through the

Visual 7

Aural 9

Read/ Write 5

Kinesthetic 9

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transformation of experience”. LSQ is a questionnaire including 80 polar

questions (Honey & Mumford, 2006) and it is designed to find out learner’s

preferred learning style. Everyone has their own learning style but they

might be using it to learn for long time but not sure of the actual learning

style that they are. According to Honey and Mumford (1982, 1992), LSQ is

contained by four learning styles which are Activist, Reflector, Theorist and

Pragmatist respectively (See Figure A2.2).

Figure A 2.2: Honey & Mumford’s Learning Cycle

Sources: Clark, D. R. (2004)

2.2.1 Implication on Learning

According to the result (See Figure A2.3, Appendix B) of this

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questionnaire, the author consists of activist and reflector.

For the activist learning style, she is open-minded for learning. Also,

she loves new experience and she will not hesitate to try any things new.

Activists involve themselves fully and without bias in new experiences

(Honey & Mumford, 1982). The activities are always be there for her since

she is always thinking of the next one when this one is just end up now.

Their days are filled with activity (Honey & Mumford, 1983). She does think

she is good at implementation which is a good way for her to learn. For the

reflectors, Honey & Mumford (1982) state that “They collect data, both first

hand and from others, and prefer to think about it thoroughly before coming

to any conclusion.” Usually, she would observe the others and ponder a lot

of perspectives before making any decision or conclusion. They listen to

others and get the drift of the discussion before making their own points

(Honey & Mumford, 1983).

Figure A2.3 Learning Style Questionnaire – Result

Activist Reflector Theorist Pragmatist

16 18 13 11

Very strong

preference

Very strong

preference

Moderate

preference

Low

preference

2.3 Myers- Briggs Type Indicator (MBTI)

The Myers-Briggs Type Indictaor (MBTI) developed by Katharine Cook

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Briggs and her daughter, Isabel Briggs Myers and it is extrapolated from

Carl Gustav Jung’s work on psychological types. The developers published

MBTI in 1962. MBTI assessment is a psychometric questionnaire designed

to measure psychological preferences in how people perceive the world

and make decisions (Myers, Isabel Briggs with Peter B. Myers, 1980, 1995).

MBTI can be applied in lots of areas such as career counseling,

professional development, team building, personal development and etc.

CPP Inc., the publisher of the MBTI instrument, calls it "the world’s most

widely used personality assessment" (CPP Products, 2009). According to

Myers (1980), MBTI is composite of four pairs of preferences which are

shown in figure A 2.4.

Figure A2.4 the four dichotomies for MBTI

Pairs Stands for Related to

E or I Extraversion –

Introversion

Where do you prefer to

focus your attention –

and get your energy?

S or N Sensing – Intuition How do you prefer to

take in information?

T or F Thinking – Feeling How do you make

decisions?

J or P Judging – Perceiving How do you deal with

the outer world?

Sources: Kathy Prem (2010)

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2.3.1 Implication on Learning

Referring to the MBTI result (See Appendix C), the author’s personality

type is identified as ESFJ.

As a person having ESFJ personality, the author seeks to develop

harmony in relationships and promote cooperation and teamwork. David

Straker (2009) explains that “They tend to enjoy a wide circle of

acquaintances, and they gain energy in social situations”. She cares about

the needs of the others even more than herself and would like to show how

capable she is. She would encourage the others and also being

enthusiastic member in a team which is the one to bring up the energy and

spirit for the team. Moreover, she will defeat and overcome all the troubles.

The author makes decisions on the basis of personal values. When making

decisions, they often give more weight to social implications than to logic

(David Straker, 2009). She feels free to express the appreciation to the

others and tries to conform to others' reasonable expectations.

2.4 Belbin Team-Roles Self-perception Inventory

The Belbin Team Inventory is devised by Dr. Meredith Belbin in 1981.

Team Role is a tendency to behave, contribute and interrelate with others in

a particular way (Belbin, M., 1981). It concentrated on how an individual

behaves with a team or group and it applies 9 different team roles to show

the behavioural traits. Belbin Team Roles (2002) describes a pattern of

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behaviour that characterises one person’s behaviour in relationship to

another in facilitating the progress of a team.

2.4.1 Implication on Learning

Referring to the Belbin report (See Appendix D), the preferred team

roles for the author are “Implementer”, “Co-ordinator”, and “Completer

finisher”.

According to Belbin Associates (2001), implementer is disciplined,

reliable, and conservative in habits. She is closed-minded sometimes and

inflexible for working because she is always follow her own

well-thought-out plan. Co-ordinator is mature, confident, goals clarifying

and brings other people together to promote team discussions (Belbin

Associates, 2001). She might not have enough confidence for being such a

chairman of a team. However, she is capable to work as a leader but also

enjoy being a good team member. Even she is good at distributing works,

she stills feel glad to work by the leader told her to do so. As a completer

finisher, she is a painstaker and she worries a lot about the work she is

done. She might be a perfectionist since she has to make sure everything

is going on a right way.

3 Area of Strengths

The following strengths of the author are summarized in four test

results.

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3.1 Good in Organizational Skill

Before the author to do anything, she would have a preview in her

mind. She will well organize herself and the others when there is work to do.

She is good at scheduling work and gets things done right before the

deadline. The author believes it would be plan ahead for success. Her

friends said she is well organized her work and she delivers her job on

time.

3.2 Good Interpersonal Communication Skill

It was never a problem for the author to communicate with other

people. She always thinks positively, and enters mindset to work well with

others and also maintain good relationships during the work. She would

maintain and build the relationships in the harmonious way. As a team

member, engender the team spirit definitely is one of the functions she had.

The author enjoys team working and tries to be appreciative and helpful to

the team members. She also prefers to interact with people during activities.

Her past colleague commented she is very interactive and friendly, not only

expressed with the internal colleagues but also presented the external

suppliers and customers.

3.3 Detailed- Oriented

The author is careful, detail-oriented which are expressed in her work

or day life. The philosophy for her is cautious. She often does the checking

for the finished work and tries to search out any errors and omissions from

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it. She is a prudent person even she is not working. In her day life, she

considers carefully before she have something to do or to say. Her past

boss said she is a detail-minded and reliable person and feel relieved for

the job she done.

3.4 Thoughtfulness

The author feels contented when the people around her are feeling

comfortable, so she always tries to comfort the others. She is likely to

express the appreciation that she feels toward the others, and consider

their feelings before her own. Since the mood is contagious, so she tries to

be cheerful and makes the other smile. Her friends and past team

members appreciated her considerate for everyone and it is comfortable

when being with her; they can sense it in usual school life and working with

her.

4 Area of Weaknesses

The author realized that she had some weaknesses after synthesizing

the four test results.

4.1 Lack of Flexibility

The author is somewhat of inflexibility for working. Once she had a

thought about how to finish her job, she might be obstructing to change.

She might be slow to respond to the new possibilities because she needs

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the time to find the way to accept it. Her schoolmate said she is obstinate

sometimes, she always prefer working on the same way even when there

are different approaches.

4.2 Lack of Creativity

The author does not have much invention to think up new ideas for

working out a project. She would prefer to do better to spot talent and

recognize where it has application rather than attempt to pioneer on her

own. Hence, she is not a creator but an implementer. Her teammate said

she is good at implementing and being so focusing on work but she might

not have much new idea for the project.

4.3 Perfectionism

Over perfectionism could be weakness sometimes. She seeks to be

perfect, faultless of every job she did. She might have unduly worried for

the work and makes her anxious. As working as a team, she might bring

higher stress to the others by focusing on preventing failures instead of

promoting future success. The author’s behaviour may into obsessive by

being perfectionism and dwelt on trivial issues. Her past colleagues and

teammate also agreed that the author is being too perfectionism

sometimes which giving stress to the other and herself.

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Implication For Career Choice

5 Implication For The Author’s Career Choice

Everybody have unique interest and learning behaviour which are lead

to the development of career. Holland (1985) contended that we can be

happy with our jobs and are able to do our jobs comfortably if the jobs are

congruent with our interests. Career interests are patterns of likes, dislikes,

and indifference regarding career relevant activities and occupations and

career interest predict career choices and performance (Lent et al., 1987).

From the test results, the author inclined to learn in kinesthetic manner.

She is not an impetuous person so she would ponder all the possibilities

that will happen prior to make a decision and to avoid any mistakes in her

life or work. As a teammate, the author would try her best to gets thing

done and detest being a burden to the team. She may not always

generating ideas but she is the one to turn the words into actions.

In terms of employment, the report recommends four styles of working

which would suit the personality of the author. These are organizing, getting

things done, designing, and check progress which are related to financial

industry. Under the haze of financial tsunami, finance job becomes more

challenging. For having a successful career in this industry, it required

some skills and techniques. Firstly, the commercial awareness is one of the

important skills while working in the financial market. Understanding how

businesses operate is incredibly important in the financial sector; they need

not only to understand their employer’s business, but also to consider how

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financer’s work relates to external commercial concerns. Many employers

put forward that the successful operation of their business enterprise

depended on employees developing their business or commercial

awareness skills (Bob & Nalayini, 2007).

As a financer, communication and people skills are critical. No-one

works in isolation and employers look for employees with good

communication skills and the ability to work as part of a team. Garvey

(2009) said “Most employees start their career working as part of a team

and eventually move into a team-leadership role. A good finance director

will often have to communicate fairly complex financial issues to a

non-finance audience, and do so simply and tactfully; graduates need to

understand and acquire the skills involved.”

A career in finance is hard work, but very rewarding in both financially

and in terms of job satisfaction. To make the most of the opportunities

offered, financers need enthusiasm and motivation. By being enthusiasm

and motivation that would enhance the working performance and building

up own reputation of the financer and the company they are working for.

Motivation and enthusiasm manifest as desire and interest, and as a driving

force that pushes to take action and pursue goals (Sasson, 2009).

6 Lifelong Learning

Lifelong learning is the development of human potential through a

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continuously supportive process which stimulates and empowers

individuals to acquire all the knowledge, values, skills, and

understanding they will require throughout their lifetimes and to apply

them with confidence, creativity and enjoyment in all roles, circumstances,

and environments (Longworth and Davies, 1996). In this generation,

everyone is talking about self-value improvement which means learning

continuity. In reality, the employer prefers their employees to make greater

contribution by upgrading their skill and qualification. The author

comprehends that the way to survive in the competitive society is to go

forward with lifelong learning and self- development.

6.1 Short Term

Looking to the future three to five year after the author graduates from

degree, she will focus on intensify several soft skills for the job maintaining

and preparing for being equipped as a wealth management advisor. There

are some examples of soft skill which including the awareness of business,

communication and people skills, and so on. Regarding the short term

course taking, the author will choose to take the Neuro-Linguistic

Programming (NLP). NLP is the structure of experience, period. When

used systematically, it constitutes a full strategy for getting any behavioral

gain (Bandler & Grinder, 1979). By taking the course, it will strengthen the

personal strength and also extend the social networking.

Moreover, she would like to take the examination of the Certification

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Financial Planner (CFP). It is a professional certification mark for financial

planners conferred by the CFP Board. For having this certificate, it would

be a confidence for the client and the company. After attaining the CFP

certification, the author would apply to be a member of Institute of Financial

Planners of Hong Kong (IFPHK) which is a leading financial planning

institution. The author can receive the latest information of financial market

and broaden her social networking through this institution. For position

movement, the author will contend to promote the job position as a wealth

management adviser. It would be big step toward the further career

development.

6.2 Long Term

Except the related industry experiences and knowledge, the higher

education is also a critical condition for promotion of higher position too.

For the coming seven to five year as the long term planning, the author will

take the Master of Business Administration course. Besides of achieving

the qualification, it provides profound knowledge of various areas of

business such as marketing, human resources and operations

management and so on. Such revelation helps the author to work out the

managerial works. After finish the MBA course, it must be a huge

improvement of her soft skills, business knowledge and an insight into her

related financing experience; it is definitely strong boost of morale for her

promotion of higher position.

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With four years of qualified, professional work experience in an

investment decision making process, she would like to take examination of

Chartered Financial Analyst (CFA) for its qualification. CFA is an

international professional certification offered by CFA Institute to financial

analysts. As became a CFA Charterholder, it would be a great impression

for her clients or the employer. It could be a milestone for her to further

develop the professional career.

7 Transferrable Skills

Wisconsin (2010) states, “Transferrable skills are skills that can be

used in every occupation, regardless of the type of work. They are

universal skills — you can transfer them from one type of work to another

without much effort on your part or training from the employer.” When

people are changing career or finding a new job, transferrable skills are

often more important than the job-related skills. Identifying your

transferrable skills and communicating them to potential employers will

greatly increase your success during the job search (Smith, 2010).

Referring to the results of completed personality tests, the author has

found some skills can be transferred.

7.1 Critical Thinking Skill

Edward (2005) described critical thining as, "purposeful reflective

judgment concerning what to believe or what to do." Critical thinking is a

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positive and useful skill, for instance, formulating a workable solution to a

complex personal problem. This skill enables the author to review different

points of view or ideas and make objective judgments. During the study or

work, she would investigate all possible solution to a problem, weighting

the pros and cons. This has been shown in the result of LSQ, MBTI. (See

Appendix B, C)

7.2 Leadership Skill

Leadership is ultimately about creating a way for people to contribute

to making something extraordinary happen, and the effective leadership is

the ability to successfully integrate and maximize available resources within

the internal and external environment for the attainment of organizational or

societal goals (Keith, 2007; Ogbonnia, 2008). Although the author is not

always be the leader in a group, but she does have this ability to be a

leader. As a leader in a team, she would motivate and empowers others to

act, inspires the trust and respect in her team members. Evidence would be

shown from the result of MBTI and Belbin test. (See Appendix C, D)

7.3 Organizational Skill

Organizational skills are essential in the workplace and are the key to

getting ahead in the business world (Bartolomei, 2010). It helps lead to

success through many paths. With well organizational skills can help

people to earn the extra time and to cover the demands of their jobs

efficiently. The author expressed this skill in both school life and working

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live. She is able to organize information, people or things in systematic way.

Moreover, she has ability of priorities establishment and meeting deadlines.

It is proved by the result of MBTI and Belbin test. (See Appendix C, D)

8 Justify Chosen Career Choice

The career choice that the author chose is entering into the finance

industry. For example, the author would choose to working as a wealth

management trainee as the entry of financial market. Being a wealth

management trainee, except of assisting the superior, the market

researching, updating and reviewing on investment portfolio to clients, and

maintaining good relationships with clients are also required.

The completed questionnaires show that her personalities are suitable

for the career choice she made. The author can work as individual and as a

team. Her conscientious and disciplined personalities would help her to

well implement the job while she is working individually. She is enthusiastic

and motivated so she likes dealing with people and establishing

relationships with harmonious way. These personalities help her to

communicate with the internal colleagues, and generating new clients.

Moreover, being thoughtfulness allows the author to maintain the original

clients. Working prudently and organizing a plan before take action enables

the author handling client’s asset carefully and also deliver works on time.

No one is perfect anyway. By summarizing four test results, the author

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found that she is not enough with flexibility. However, people will change

and grow up by their exposure to different life experience. Based on the

author would start her career at a trainee or junior level, so her job usually

related to marketing researching and interaction with clients. Once the

greater life and working experience and awareness of the industry are

gained, the ability of flexibility should be improved to deal with clients and

adapting in this fast changing market.

9 Conclusion

I thought I knew well about myself but I am quite surprised about some

outcomes when I got the results of several tests. I am astonished by some

personalities which are inside me that I never realized. For example, the

report of Belbin test supposed I might be a coordinator. At first, I think I am

definitely not a leader at all, but I start to believe it since I read the

description of this role. I found that I am always acting like those described

contribution of the role and I have no idea it is a leader being.

In addition, the four test results remind me the connection betwixt the

organizational skill and flexibility. Initially, I think I am flexible when I am

having thoughtful personality which is likely to humor the others. However, I

find out that I would always work on the same way with my organizational

skill. From the angel of working style, it seems I don’t have much flexibility.

More flexibility would gave me the chances to finish my work in different

way but more efficiently. Hence, more flexible to adapt a variety of people

28  

and situations would be the direction of growth for my living and

occupation.

In conclusion, this is a report which offers the scarce opportunity to me

to have a fully comprehending of my personality and skills. Having a

greater future and successful career via the further improvement of my

present strengths and turn the weaknesses into strengths.

29  

Part B

1. Introduction

1.1 Reason of Choice of Topic

Based on the result from the several completed personality and

learning style test of part A, and personal interest of the author, it was

decided to enter into the wealth management industry for the first choice of

her career, such as to start with the wealth management trainee and then a

promotion for wealth management advisor or financial planner would be

short term career goal for the author. As wealth management or financial

planning is generally including investment, that is why the author would

choose the “the choices of investment products under the time of inflation”

as the topic of part B. Investment is not only a tool to earn the present

return, but also the tool to gain the future return under the varying inflation

that everyone is dealing with. Before doing the investment for hedging

inflation rate, a well understanding of inflation is critical for being as a

wealth management advisor or financial planner.

Beside the need for the proper management of client’s capital that

against the inflation but also for the individual need as well. How could a

wealth management advisor build up his or her reputation and establish

trust from clients if he or she could not manage his or her wealth well which

could resist the encroachment from the inflation? When the author

becomes a wealth management advisor she should be able to interpret the

30  

features and trend of inflation, most importantly, she would know what

investment products are worth of investment while forming the portfolio for

the clients. In this changing financial market, it is crucial to choose the right

one out of a bunch of investment products which contained with various

types, maturities, levels of risk and others.

1.2 Academic Objective

The part B of dissertation is going to study the issues of inflation and

investigate the several types of investment products as the financial tool to

hedge against inflation. People’s living quality changes better with the

growth of economic development and the money supply is the essential

factor. The economists believe that the high rates of money supply growth

caused the high rates of inflation. Inflation is an economic phenomenon of

the appreciation in the general price level of goods and services which

continue over a period longer than a day, week, or month.

While the general level of prices of goods and services are rising

substantially and persistently, which means the value of money is falling

gradually. Friedman (1966) believed that the appreciation of the quantity of

money relative to output is accompanied with inflation which makes

inflation became an always and everywhere a monetary phenomenon.

Under the time of inflation, the given good’s entire price is probably going to

increase over time, so corporations and consumers will make their

purchases as soon as possible. In short term saying, it would be an effect

31  

that inclines the economy keep moving actively by lots of spending and

borrowing; in long term aspect, this effect encourages investments. As an

individual, a person has nothing to do to change this monetary

phenomenon; therefore they choose to protect themselves through

investment/ financial planning. Hence, the influence of inflation should be a

consideration when the investors or the financial planner making

investment decision and anticipating the financial return expectations.

Since the focus always concentrate on the capital gains and income

flows while debating the returns of the investment, which might ignore the

need to consider the decline of purchasing power by inflation. According to

Alexander (2005), this neglect or oversight may provide the investors or

financial planner a distorted picture of the actual financial performance and

he also brings out three issues regarding to the inflation while making

investment decisions under the corrosive impact of inflation on investment

income: First of all, which is the most appropriate to use among the several

inflation measurement when calculating the return after inflation? Secondly,

what is the best assumption for the inflation future rate when making

investment? Finally, what are the implications for financial returns and

investment decisions with respect to asset allocation in the light of inflation

prospect? The purpose of the part B is going to identify the impact of

inflation, investigate the impact of inflation, addressing the three inflation

issues arising from Alexander (2005), study and analyze some investment

strategies to recommend the appropriate investment choices under the

time of inflation as an ultimate outcome of this part of dissertation.

32  

1.3 Outlines of section

Literature Review

1. What is Inflation?

1.1 Effect of inflation (For the Economy)

1.2 Effect of inflation (For Individual)

2. The Three Inflation Issues

2.1 The Most Appropriate Inflation Measure to Calculate the

Return After Inflation

2.2 The Best Assumption for the Inflation Future Rate for the

Investors

2.3 The Implications for Financial Returns and Investment

Decisions with respect to Asset Allocation for Investor in

the light of Inflation Prospect

3. Recommended Investment Products

3.1 Commodity

3.2 ETFs

3.2.1 Inflation Indexed Bond

3.2.2 Real Return Funds

3.2.3 Precious Metals

3.3 Real Estate Investment Trust

3.4 Stocks

33  

Literature Review

2. What is Inflation?

Inflation is not a new word to everyone, although it is a term

created from economic theory or discussion. However people do not

need to be an economist to know this term since everyone is living with

it daily. Inflation might be construed into different concepts but all the

people know that it is a continuous rise in the prices. According to

Celeonu (2006), inflation depicts an economic situation where there is

a general rise in the prices of goods and services, continuously.

Aggregate or general is the critical point while defining inflation; it

implies the movement of whole basket of goods in the overall level of

prices. Makinen (2003) stated that “the inflation is not refer to changes

in one price relative to other prices and those changes are common

even when the general level of prices is stable.” There are a lot of

causes that form the inflation but back to basic, inflation is mostly

caused out of the available goods which are being competed with

excessive money at the original current prices and the prices start to

rise. Hence, there is an interesting statement “Inflation, simply

explained, is the printing of money.” by the National Inflation

Association (2010).

2.1 Effect of Inflation (For the Economy)

Broadly, inflation can be divided into four types: Creeping inflation

(low), Walking inflation (moderate), Running inflation (high) and

34  

Hyperinflation (out of control). Creeping inflation appears when the

annual rise in price of less than 3 percent which is a low inflation rate.

According to Lasanthaw (2010), a low inflation rate is beneficial to a

country and zero or negative inflation is considered as bad. Such low

inflation is providing a stable and essential environment for economic

growth. During the low rate of inflation, the interest rate is lower in both

nominal and real terms so the investment is encouraged. When the

real interest rate becomes lower, the household consumption and

housing investments are tend to have a notable sharp growth. It leads

to a productivity improvement and the businesses can be developed

without pressure of raising prices. It would be the opportunity for the

businesses to capture a better profit margin from the start since the

commodity price started to rise and the price of finish goods will be

climb up too (Liew, 2008). The low inflation is not only reaching

significant improvements in economic growth and productivity but also

a marked reduction in economic volatility (Bernanke, 2005). The low

inflation rate promotes the rise of consumption and housing investment

which contributes to a healthy growth of GDP. As the productivity

ameliorated and the businesses developed prosperously, the rate of

unemployment would be lower during the effect of low inflation rate.

Low inflation was often associated with lower unemployment and

strong GDP growth than high inflation years (Rees, 2008).

Nevertheless, Arvidson (2010) brought out that the unemployment

drops below a certain rate and referring to the popular economic

35  

theory known as NAIRU, it will lead to higher inflation ultimately.

When the economy goes into the Running inflation, it means there

is rapid increment at the rate of 10 to 20 percent in price annually.

Such inflation is coming with the enormous adverse impacts on the

poor and middle class. The level of output of the economy is often

heavily hit by the high inflation (Liew, 2008). It might reduce the

competitiveness of price which makes the businesses to compensate

their operational losses as the result of instable common prices by

increasing their prices. When the commercial entities are not achieving

their profit and revenue target, they tend to go down since the

customers are not willing to spend more. As the businesses do not

gain sufficient income of money that they may have to diminish the

input of resources and capital and the productivity would be

deteriorated. The major effect on cost is human resource and the

businesses need to downsize its human resource to meet the cost for

good profits (Haider and Jamil, 2009). Although the famous theory -

Philips Curve (1958) presented “the lower the unemployment in an

economy, the higher the rate of inflation”, but it is only applying on the

short run, the inflation rate and unemployment are not related in long

run (Ogbokor, 2005). The rising price also distorts the behavior of

consumer and abates the household consumption directly. The

degeneration of productivity and consumption are crucial to the growth

of GDP as well as McMahon (2008) mentioned “Inflation will lead to

deterioration of gross domestic savings and less capital formation in

36  

the economy and less long term economic growth rate of the

economy.” Lexus (2011) argued “in a way inflation can be viewed as a

sign of a robust economy”. However, the studies by Levine & Zervos

(1993) and Barro & Sala (1995) suggested that inflation was not a

robust determinant of economic growth. As the Hong Kong inflation

rate in 2010 is ranged from 1 to 3 percent and Hong Kong budget

speech (Tsang, 2011) delivers that the expected average inflation rate

for 2011 is 4.5 percent. Therefore, it seems it has been rising from the

low inflation to moderate inflation and the government should noticed

and prepared the effect of moderate inflation will bring to economy and

individuals.

2.2 The Effect of Inflation (For Individual)

Albeit that everyone knows the inflation occurs when there is an

increment in price of general goods and services, but the effect on

individual can be divided into two groups, the fixed income group and

the flexible income group. The fixed income group endures the hardest

hit by the impact of inflation which this group is representing the

wage-earners and salaried people. Pania (2009) stated that “although

wage-earners, by the grace of trade unions, can chase galloping

prices, they seldom win the race”. The reason is simple because their

wages do not ascend along with the price movement. The purchasing

power is fall in poor and the middle classes since their wages and

salaries are more or less fixed but the prices of commodities continue

37  

to rise (Celeonu, 2006). While the fixed income group loses during the

inflation, the flexible income group gains instead. The flexible income

group is representing the investors, businessmen, speculators,

industrialists and the others with mutable income. These people gain

during the rise in price and become rich at the cost of fixed income

group (Chiarella, Hsiao & Semmler, 2007). If someone who accurately

anticipates the inflation can alter their actual profits by lending,

borrowing and buying activities hedging against the loss of income

caused from inflation.

3. The Three Inflation Issues

3.1.1 The Most Appropriate Inflation Measure

to Calculate the Return After Inflation

Based on the aspect of financial planning, Consumer Price Index

(CPI) is the most appropriate measure of inflation which is changing

year over year. In contrast to many other measures of prices, such as

the GDP deflator, to name but one, the CPI has the advantage of being

restricted to the goods and services that are purchased by individuals

(Alexander, 2005). This is the inflation measure which is the most

common one and extensively adduced. Unfortunately, nothing is

perfect. A critical shortcoming has been found in CPI. The United

States Bureau of Labor Statistics (2010) defined “The CPI is a

measure of the average change over time in the prices paid by urban

38  

consumers for a market basket of consumer goods and services”.

Actually, the weight of average change is founded on the family

expenditure survey. Hence, the outcome of CPI could be provisionally

exaggerated or minimized due to the weights are merely regularly

renewed as the expense pattern of consumers might be varied, for

example likes the pricey products might be replaced relatively by the

much cheap ones. In addition, there is another fact should noticed, the

CPI is not reflecting the outlays by every specific individual or

household, for example, tobacco is a component of CPI in Canada, but

the majority of Canadians are non-smokers (Gulati, 2010). To sum up

the above arguments, the average change over time in CPI may be

only offer a big picture which roughly expresses the general reality of

living standard; in spite of this, it still represents the greatest practical

measurement while appraising the financial returns.

3.1.2 The Best Assumption for the Inflation

Future Rate for the Investors

The bank usually wants to keep inflation rate of closely 2 percent. The

core inflation stays between 1 and 3 percent band as the inflation is

fluctuating. Alexander (2005) mentioned that the price shocks coming from

the eight volatile items and changes to indirect taxes could lift or lower

overall CPI inflation outside the bank’s target band, but only temporarily.

Hence, at the time of making investment , the best assumption for future

inflation rate would ranging from 1 to 3 percent in the short run and it would

39  

be at average 2percent in the duration of medium to long run.

3.1.3 The Implications for Financial Returns

and Investment Decisions with respect

to Asset Allocation for Investor in the

light of Inflation Prospect

The outlook of inflation is also presenting the implication of asset

allocation. Firstly, the government always represses the inflation for the

future economy, so the platform for cash investment in short run would be

set by the repressed inflation outlook. For example like a 3 month T-bills, an

average return per annum may be about 4.6 percent or 2.6 percent after

inflation. It is higher than today since the active monetary policy cause the

irregular low current rate. The expected return of after inflation of 2.6

percent reveals that the significant role of cash in portfolios suggesting a

protection of savings value which created scanty wealth.

Secondly, bonds are always providing a higher income of interest than

cash investments, such as the bonds with diversified basket is expecting an

average return per annum of 5.75 percent, or 3.75 percent after inflation.

The yield is higher than today once more as it is reflecting the expectation

for a future increase in interest rates in monetary policy (Newton

Investment Management, 2010). Furthermore, the return of after inflation is

lower than today which is because of the inflation volatility premium is

40  

becoming lower and the gain of capital generated by the low inflation

economy adjustment is not going to replicate. The return of bonds would be

more than the cash investment consequently and it should be consisted in

the portfolio with well diversification.

Finally, the future expected average return of American equities is 7.75

percent per annum or 5.75 percent after inflation. Referring to Alexander

(2005), the lower after inflation return in the future is due to slower

corporate profits growth and the lower risk of lost purchasing power from

the volatility in inflation. As a result, the return of equities is greater than

bonds or cash investment. Equities might make the plenty of sense when

formulating a portfolio as the exposure amount is subject to the risk

tolerance and time horizon of investment of an individual investor.

4. Recommended Investment Products

After finishing the above sections of studying and researching of

inflation and the long term stock investment strategy, there are four types of

investment product choices that recommended by the author.

4.1 Commodity

Referring to Demidova-Menzel & Heidorn (2007), the fiancial view of

commodities is that an investor looks at all transportable natural resources,

raw materials and products which are traded with competitive bids and

offers. The imposing correlation advantages have shown in the broad

41  

commodity indexes which the indexes are less correlated with equities and

bonds traditionally. The commodity based investment is becoming an

essence inflation hedging asset in the strategic allocation for many

investors under macroeconomic conditions indicate a protracted bullish

outlook in current years. For an instance, the emerging markets are

promptly developed and the commodities are weighty relied, for examples

like base metals and platinum. Commodity investments, which represent

managed futures contract exposures to raw materials industries such as

agriculture, energy, industrial metals, livestock and precious metals, can

offer investors real expected return and well documented diversification

benefits (Keenan, 2009).

Especially in Asia, the demand grows strong as well as the economic

growth which drives the higher price of commodities and though the prices

drop along with stocks since the financial crisis in 2008. A. Rosenberg

(2009) stated “An interesting observation about commodity prices, however,

is that they bottomed-out in 2008 at levels higher than previous

recessionary sell-offs.” For example like the oil price, it had been bottomed

at $36.51 per barrel in 2009, in contrast with $19.33 per barrel in 2001.

As the commodities price are expected to rise rapidly while demand

remaining robust. The increase in dollar-denominated commodity prices

may also be the result of the pressure on the US dollar, as it reduces

foreign currency prices for dollar-denominated commodities and boosts

42  

demand (UNCTD, 2009). In Hong Kong commodity market, the investment

of real gold or paper gold are suggested by the author, these two

investment products can be traded in The Chinese Gold & Silver Exchange

Society.

4.2 Exchanging Traded Funds (ETFs)

Exchange-Traded Funds is simply called ETF, ETF can be traded like

listed stocks but it is differ from the common stocks. ETF is like a mutual

fund, they both are compromised of a basket of underlying investments;

within contain several stocks and/ or bonds (Ray, 2009). An ETF is a fund

which usually tracks an index, such as Dow Jones, S&P 500 or Hang Seng

Index, and its objective is to imitate the return of an index only but not trying

to outperform the index.

4.2.1 Inflation linked Bond (ILBs) related

ETFs

Inflation linked bond is an effective tool allows the investors quest the

enhancement of the risk return profile of their investment portfolio by the

inflation hedge and exposure of US dollar as the improvement of

diversification. Campbell, Shiller & Viceira (2009) stated that “The risk in

the broader asset allocation plan would be decreased since the adding of

global inflation linked exposure and US TIPS (the Treasury Inflation

Protected Security issued in US) exposure.” The more countries issue ILBs,

43  

the more opportunities for diversification.

ILBs bear the rate of fixed coupon which is not changeable over the

maturity of this bond. At the time of buying this bond, the coupon reflects its

real interest rate. However, the principle value would be modified along with

the variation of the value in the price index which refers to the CPI of its

country (keenan, 2009). The return of ILBs is similar with the nominal

bonds and its return is combined by the real return rate and the extra return

from inflation which is the special feature about ILBs. Inflation breakeven

rate refers to the difference between the nominal yield on a conventional

bond and the real yield on an inflation-indexed bond of the same maturity

(Yiu, 2007). Here is an example, a 5-year TIPS that trades at 300bps higher

than a 5-year Treasury bond implies 3 percent annualize inflation.

Hence, ILBs will outperform the nominal bonds if the inflation is higher

and vice versa. When inflation is creeping up around the world, purchase

the ILBs directly or through an ETF (which is contained with ILBs) would be

an excellent vehicle to hedge against inflation. For the choice of such ETF,

IShares Global Inflation-Linked Bond ETF (ILIL-LSE) is recommended by

the author.

4.2.2 Real Return Funds

The ETF contained “real return funds” is an investment product which

designed to provide the “real return” to the investors while inflation occurs,

44  

and in terms of financial and investment, “real” is refer to “inflation adjusted”.

For the investors who need liquidity but do not have sufficient time and

capital to buy traditional hedges such as commodity and gold, the

purchasing of protection of inflation in real return fund is a recommended

choice. As Montanaro (2010) said “The time to get the insurance is before

the house is burning down, so there is still value to adding these types of

holdings in your portfolio.”

The IQ real return ETF (CPI) attempt to achieve the goal that

mentioned above by the assets allocation with the several investment asset

classes, it may includes stocks, foreign currencies, Treasury instruments

and gold (Ron, 2011). This CPI is a new born baby of ETF so it cannot be

sure that its ability to succeed the “real return” goal as it does not tested by

the serious inflation yet.

Nonetheless, the author is suggesting the following real return fund

when the investors are picking up an ETF. In the speaking of asset

allocation, the Fidelity fund is punished by the weird allocation at the same

time the Permanent Portfolio (PRDFX) is perfectly bloomed by the same

weird asset mix. The investment allocates its assets of 35% in U.S.

Treasuries, bonds and other dollar denominated assets, 20% in gold, 15%

in aggressive growth stocks, 15% in natural resources stocks and domestic

and foreign real estate, 10% in Swiss Francs and 5% in silver. Although the

investment mix adjusted, but the prerequisite of the holdings for main

45  

economic aims are sustained such as the real estate and gold for inflation.

In an inflationary scenario, all slices, save the hefty stake in Treasuries,

should benefit. Rising interest rates will hurt that slice, but if the fund's

allocation works as intended, the rest of the portfolio should more than

compensate (Ody, 2009).

4.2.3 Precious Metals related ETFs

The precious metals are mostly used as exchange media and value

storage since human found the existing of precious metals and realize how

precious it is. In this generation, the precious metals are still precious but it

is mainly functioned with the stores of value as being investment in gold,

silver and etc. Precious metals like gold has 60 percent correlation to

inflation and making its value rise with inflation while the intrinsic value of

cash purchasing power is weaken (Andriotis, 2011). Furthermore, Levin,

MacMillan, Wright, and Ghosh (2004) discovered that cointegration

techniques using monthly data from 1976 to 1999 show that gold can be

regarded as a good long-term inflation hedge. However, it requires bunch

of capital for holding gold so people would hold gold directly by buying

ETFs which contained with several stocks that related to gold like the gold

mining business. To hold ETFs in precious metals can reduce the cost of

holding gold but yield the benefit of the rise in price of gold over the

duration. Hillier, Draper, and Faff (2006) found that gold and silver have

negative betas that are very small in absolute value but statistically

46  

significant when measured against U.S. stocks, thus providing hedging of

an investors stock portfolio. Thus, investing in an ETF which consisted by

precious metals and its related businesses would be a feasible tool for

inflation hedging. The ETFs market in Hong Kong, the author would

proposes two choices of gold ETFs and they are SPDR GOLD TRUST

(2840.HK) and VALUE GOLD ETF (3081.HK).

4.3 Real Estate Investment Trust (REITs)

In simply say, REITs is company that buys, develops, manages and

sells real estate assets and allow investors to invest in a professionally

managed portfolio of real estate properties (Petillo, 2003). REITs are able

to provide a relatively attracting benefit of diversification for an investment

portfolio since its historical correlation is low to various types of

conventional assets like bonds and stocks. According to Keenan (2009),

these investment vehicles, along with the attractive portfolio enhancing

characteristics of securitized real estate should continue to facilitate the

global growth of this unique asset class that combines the capital

appreciation potential of equities and a current yield closer to fixed income.

REITs have offered outstanding performance in long run while the

equities are not correlated and it is a product with solid and steady income

source and the potential capital to appreciate in long run. As Fisher &

Goetzmann (2005) stated that real estate is a good hedge against inflation

due to the property returns and inflation measures are historically

47  

correlated. It is an asset that having the ability to enter the asset class

which is widely diversified and also can be easily traded on the

international equity exchanges. A large commitment of capital is not

necessary for the REITs but it stills providing daily liquidity and wide

diversification due to manifold types of property and geographic location.

For the entry of universal and wide property, REITs offer investors the way

with the tax efficient, compelling and transparent system.

Graff & Cashdan (1990) presented that “A building leased net of

maintenance, taxes and utilities; with contractual rent increases tied the

CPI might represent an excellent inflation hedge.” Related to the REITs

market in Hong Kong, the author would advises the Link Real Estate

Investment Trust (0823.HK) and the SUNLIGHT REIT (0435.HK) as the

investable REITs in HK. Consequently, the factors and facts mentioned

above are supporting REITs to be a good inflation hedge.

4.4 Stocks

Using stocks as an inflation hedge can be followed by two major

premises: 1) Choosing the stock with the implied business which is having

the high correlation to inflation. 2) Holding the correct stocks portfolio for

long term investment. For the first premise, why choose the stocks that with

high correlation to inflation? If the stock’s company is doing the business

with high correlation to the inflation that means the value of this business

would be raised along with the inflation rate. As the inflation rate rising, the

48  

market value of this business would be appreciated. While there is

appreciation in market value of such business, the price of its product will

be arising too. That is the reason why the stock price of such business is

increasing with inflation when the other stocks price of the other industries

is being dropped as they are not coped with the inflation.

According to National Inflation Association (2010), the sector of

precious metals and mining have a 60 percent correlation to CPI inflation

and the correlation between agriculture price and CPI inflation is 55.9

percent. Due to the high correlation to inflation, making it one of just a

handful of industries where stocks rise with inflation (Andriotis, 2011).

Therefore, the author would recommend the stocks of these two industries

such as the Cresud Inc. (CRESY) as the agricultural stock and the

Almaden Minerals Ltd. (AAU) as the metals stock in U.S exchange market.

Furthermore, the Zijin Mining Group Co Ltd (2899.HK) and Chaoda Modern

Agriculture (682.HK) which are trading in H.K exchange market are

suggested too.

Regarding the second premise, when the stocks or shares have been

cautiously chosen, such long term stock investments would be an effectual

hedge against inflation even though different investors might have absolute

distinct motive for using such stock investment in long run. There are

several studies which are done by Oudet (1973) and Branch (1974) that

concentrate the practicability of holding stocks as the hedging of inflation.

49  

These studies are revealing the real return of stocks should be independent

of the inflation rate which is the essential factor when choosing the stock as

an inflation hedge. According to Fama and MacBeth (1974), the estimation

of beta for the relationship between the real return from a stock and the rate

of inflation should be one. It is a simple rule can be pursued to establish a

long term stock portfolio which could offer a sound return that much better

than the inflation rate. For an instance, a previous report by Merrill Lynch in

2000, this report displayed a yearly adjusted portfolio which lasted for 20

years (1980-2000) and consisted of 10 highest yield stocks in Dow Jones

industrial average offered a total return of 1,227 percent when the inflation

rate only rose by 373 percent. Albeit that report is conducted years ago, but

the point of view is still clear which is suggesting that a real return with a

thousand percent over two decades and beating the inflation at the same

time are not something miracle but only a stock investment portfolio with

cautiously establishment.

Bodie (1976) explained an alternative definition as using stocks as

inflation hedge, which is “a stock is an inflation hedge as long as it will yield

a return exceeding the rate of inflation”. As interpreting this definition, the

investors might need to specify the return that they really want as match to

the inflation expected rate plus a particular premium rate while forming a

long term stock investment portfolio, and then do the selection referring to

certain rules, the selected stocks would be the most proper tool and

opportunity to achieve the specified destination of investment. The strategy

50  

for long term stock investment as a hedging of inflation is simple. According

to Hsieh & Hamwi (2002), “purchase ten highest yielding stocks in the Dow

Jones industrial average for an equal number of shares, do the

replacement of those stocks that rank among the top ten no more for once

a year.” When this method achieved an extraordinary real return, it would

be facilitating to observe if this strategy is still function futurity and if it will

yield the highest potential real returns at always. By holding the right stocks

in long run is aim to yield the real return against the inflation. Boudoukh &

Richardson (1993) defined that “the aggregate level and in the long run, the

stocks sector will pass on inflation in the form of higher prices.” Jaffe and

Mandelker (1976) also report a negative relation between annual stock

retums and concurrent rates of inflation over short sample periods but a

positive relation over the much longer period. An experiment has done by

Boudoukh & Richardson (1993) which confirmed the latter positive, long

term inflation effect. Thus, a long term investment portfolio with stocks

should be an effective vehicle for inflation hedge but only with the critical

matter – a long time horizon. Moreover, it would be a valuable research to

study that is the stock effective enough for being an efficient tool to do the

long term inflation hedging

5. Summary and conclusion

As the author chose the title of “The choices of investment products

under the time of inflation” as the research topic for part B of dissertation,

she decided the two major objectives of this study which are the effect of

51  

inflation that brings to economy and investment, and what are the most

appropriate investment products to fight the inflation.

After the research and some critical thinking, the author found that the

when the inflation is low, its disadvantages might be covered by its

advantages, especially for a country recovering from the break-down

economy or the salary of individual may get raised while the employer

tackling the inflation causes. However, the economy and most of the

individual suffered when the inflation went higher even out of control

eventually. Inflation made the lower purchasing power of cash so a lot of

investors are making investment rather than keeping the cash in their

pocket.

Recently, Hong Kong is facing the rising inflation from low to moderate,

that means the economic growth and the living standard of individual or

household are going to be affected slightly and gradually by the moderate

inflation. According to Tsang (2011), “the risk of rising inflation is mounting

in Asia.” While the US dollar is probably stay soft and the global price of

food and commodity are going to remain raised, these two issues are

putting further inflationary stress on Hong Kong. Also, the food price and

local rentals are increasing incessantly in Mainland; it would be a

remarkable impact to inflation in Hong Kong for this year. The three issues

of inflation have assisted the wealth management advisor or financial

planner to formulate an investment portfolio.

52  

Moreover, the implication of investment in the light of inflation outlook

truly expressed the meaning of the return after inflation and also the implied

value of the main different investment products on the financial market.

Hence, it helped the author to make recommendation of the investment

products choices under the inflation. In the aim of hedging inflation, the

investors shall invest in the investment products which are providing the

real return and the correlation to inflation should be noticed yet not every

investment products are acting as an inflation hedge. As a result, the author

has been suggested the following investment products as the inflation

hedge: the Commodity, the Real Estate Investment Trust (REITs), Stocks

and the ETFs related to Inflation Linked Bonds (ILBs) , Real Return Funds,

Precious Metals,

The study in part B of this dissertation is emphasized on the effect of

inflation and creating the idea of investment choices based on the inflation

issue. Therefore, the analysis result might only usable and functional

during the duration of inflation. As the investment choice under other

problems of economy such as recession and economic bubbles, it is left for

the other savant and researcher to fill in the hole.

53  

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Appendix A - Reflective Statement

The author was preparing the related articles, journals and books for

months to support the content of part A before she is going to finish the

discussion of part B. The author gets to know more about herself by

finishing the discussion and finding of part A. When someone is deeply

interpreting about something, they will know what work should be done and

the way to get such work done. As the author profoundly understands her

personality, learning style and the suitable working style, it is like a bright

light that guide the author walks on the right way to look for her career plan.

After the part A is finished, the bright light has helped the author to clearly

clarify her own career choice as she is going to step in the society for the

first time in her life. The part B of this project analyzed the inflation effect

which is involving with the author’s industry, and it would increase the

cognition of the industry that she is going to entry.

The author got further understanding of her personality and skills by

completing the following tests and questionnaires, VARK, Learning Style

Questionnaire, Myers- Briggs Type Indicator and Belbin Team-Roles

Self-perception Inventory. The summarization and combination of

personality and skills could deliver her trait.

As an outcome of VARK, the author is likely to work or learn in aural

and kinesthetic way, she enjoys working things out through the discussion

with others and practicing with good use of the past experience. According

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to the Belbin report, it shows that she would be the implementer and

coordinator as the role play position in a team; these two positions

expressed she can be relied on and the one who brings out the goal and

spirit of the team. Moreover, the author is good at seeking harmony in

relationships and promotes cooperation and team work as resulted from

Myers-Briggs Type Indicator. In addition, the result of Learning Style

Questionnaire, she is a combination of activist and reflector. It is revealing

that the author is an active person with a nice interpersonal communication

skill by always having activity with people and planning works with detail

oriented mind. To sum up the result and implication of the above tests, they

are the evidences that supporting the author becomes an interactive and

reliable person at the same time with good organizational skills and fine

interaction skills.

The author has discovered that she has several strengths and

weaknesses while she analyzed the implication of the four tests. For

example like, the author is having an excellent organizational skill but lack

of flexibility and creativity. Hence, she chose her career choice not only

based on her interest but also the unique personality, strengths and

weaknesses. The author determined to enter the financial industry as her

career choice, and she understood a fresh graduate does not having

sufficient and significant working experience although the fresh and green

are their selling point. Therefore, she has planned the lifelong learning

which the self-value improvement is, for example, to pass an examination

73  

of Certification Financial Planner in short term and achieving the Master of

Business Administration qualification. Furthermore, the author justified the

chosen career choice by expounding her own characteristic and

transferrable skills.

In the view of justification of the author’s career choice and the

conclusion of part A, the outcome indicated that it is suitable for the author

to be a wealth management advisor or financial planner. The trait of

interactive helped her to communicate with the internal colleagues,

generating new clients and keeping the original clients. Good

organizational skill and the reliable personality enable the author manages

client’s asset cautiously and deliver works on time. Also, her transferrable

skills such as critical thinking skill would support the author when she is

finding jobs.

The author selected the topic of “The Choices of Investment Products

under the Time of Inflation” as the study direction when she is fully

understood about herself and her career choice. As her ultimate career

goal (for now) is going to be a professional wealth management manager, it

requires abundant knowledge on financial market and the economy. Hence,

that is the reason why the author chose this topic sine it would be a start for

her to do the study regarding the financial market and economy. By

studying this topic, it brought an opportunity for the author to experience

the work of the wealth management advisor or financial planner, since they

74  

need to study the market research through (even not accomplished one)

before making investment advice.

In the part B of dissertation, the author is concentrate to dig out the

true impact of inflation and it’s inside implication to the economy, investors

and the investment. No matter what is the rate of inflation, there are always

positive and negative effect to the economy, investors and investment. As

the author studied the impact and implication of inflation to investment, she

made the recommendation of the proper investment products which are

worth to invest in during the inflation.

Finally, this is the first time ever that the author knows so much about

herself after finish the whole part A and part B of the dissertation. She

discovers more about the personality that she already knows and the other

traits that she doesn’t know at all. Also, she really learnt a lot about financial

industry especially the selection of investment products. It is going to assist

her to step in the wealth management area.