Late last year, the Investor Education Centre published a study of retail investors in Hong Kong. The research was based on both quantitative surveys spanning more than a thousand respondents and qualitative interviews with focus group panels.

One of the headlines is that retail investor participation continues to be extremely high. Roughly 3 in 5 Hong Kong adults made an investment in the past year; half of those investments were in the stock market.

Central District of Hong Kong -- financial Hang Seng Index

Image source: Getty Images.

To use an extreme contrast, in India, it's been estimated that only 2% of the population invests in stocks.

It's especially good news when considering the returns of various asset classes in Hong Kong over the long term. My colleague Hayes Chan examined the long-run returns of stocks, bonds, cash, and property going back to 1980. Stocks ruled the roost, beating even property.

Period

Hong Kong Residential Price Indices

Hang Seng Index (INDEX: ^HSI)

January 1, 1980

19.9

889

December 31, 2017

352.8

29920

Whole Period Return

1,673%

3,266%

Annualized Return

8.08%

9.97%

Rental/Dividend yield

2.62%

2.98%

Annualized Total Return

10.70%

12.95%

Source: HK Government, HK Exchanges & Clearing, Bloomberg. Yields are as of August 2018.

Not all the news was cause for celebration, though. Here are four of the more troubling dynamics at play among retail investors in Hong Kong.

1. Investment holding periods aren't long enough

The returns cited in the chart above are ­long-term returns, captured by investors who own stocks over decades. Not many Hong Kong investors are putting themselves in such a position now: The IEC report says "investors tend to be quite active in stock trading, with an investment horizon of less than half a year" (emphasis added).

Half a year is almost never enough time for a company to thrive or fail. It is almost never enough time to allow an investment thesis to play out, or not.

Hong Kongers tend to hold blue chips longer -- "an average of 3.3 years" -- which is good, but then the survey also shows that one-fifth of investors sold new IPOs on their very first trading day.

2. The Hong Kong home market bias is worse than reported elsewhere

Almost all stock investors purchase stocks listed on the HKEX main board. About half purchase the more speculative growth stocks on the Growth Enterprise Market, or GEM.

But the home market bias is real: Just 3% of investors buy stocks outside of HK and mainland China.

This figure is dramatically lower than what other published studies have shown in other markets. Vanguard measured this problem for five major markets across the world:

Country

Global index weight

Domestic equity exposure

U.S.

50.9%

79.1%

U.K.

7.2%

26.3%

Australia

2.4%

66.5%

Japan

7.2%

55.2%

Canada

3.4%

59%

Source: Vanguard (link opens PDF).

Looking beyond Hong Kong's borders provides diversification, obviously -- but it also opens up local investors to some of the best companies in the world, trading in other markets. Not all such stocks are easily accessible to Hong Kong investors, but with certain brokerages, many U.S.-listed stocks are readily available.

3. Governance issues are ignored

When you invest in a stock, you become part-owner of that business. J. Paul Getty put it like this: "Stock certificates are deeds of ownership in business enterprises and not betting slips."

Sadly, local investors don't share that sentiment. Just 16% of HK investors have ever voted a proxy in a company they own. Only 1% have voted on three or more occasions.

The reasons why exhibit a profound sense of powerlessness, as well as a lack of understanding.

  • 58% say they don't vote because the "voting power of small shareholders is not enough to make a difference"
  • 40% say they don't know how to vote
  • 35% say they didn't know minority shareholders even had a vote
  • 22% say that "corporate actions are none of my business"

There's plenty of investor education needed on this topic, a void I hope Motley Fool Hong Kong will fill.

4. Hong Kong investors expect average returns of 19%...per year

The Hong Kong investor's expectations of future returns are likely to lead to disappointment, if you go by the maxim that "happiness equals expectations minus reality."

According to the IEC report, local investors self-reported returns of 13% on average. That's quite good compared with long-run average returns from across the globe. Yet even 13% will disappoint when you expect 19% per year.

Close to half -- 44%, to be exact -- of investors who answered the survey expect 20%-plus returns per annum from stocks.

There's more of a disconnect among mutual fund investors. To quote the IEC report, "Despite the perceived medium/low risk level of funds, over 40% of investors expected 20% or more annual returns from their fund investment." (Good luck, HK fund managers!)

Consider again the table above that my colleague Hayes Chan put together. Stocks beat any other asset class over the long term, including property. Stock investors should expect higher returns, but with two crucial facts in mind:

  • Stocks are riskier than other asset classes.
  • To capture long-run returns, investors need to hold for the long run.

We've laid out the full case for this in a brand-new Fool.hk report called "The 4 Rules for Winning in the Stock Market: A Foolish Guide for Hong Kong Investors."

I highly encourage you to download a free copy right now -- click here now!

This post first appeared at our sister site, Fool.hk.

Brian Richards is a director of Motley Fool Hong Kong. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.