‘Always look on the bright side of life…’
as the song goes. Pretty good advice from the point of having
a positive outlook on life but don’t throw caution to
the wind, particularly in the field of personal finance. Being
over-cautious on the other hand can mean going nowhere at
all so one should aim to find the right balance. Everyone
needs to make money to live. Having made some money we then
have to find ways to get that money working so that one day
we won’t have to work. There are many ways to make money.
Some may seem so appealing we are tempted to ignore the possible
downside. There is usually a ‘gold rush’ going
on somewhere. If it is not gold itself, it may be technology
stocks, property or any asset which seems to offer an easy
way to make quick money. Let’s look at some of the ways
fortunes can be made – and lost!
Cash
Accumulating large sums of cash in deposit accounts is a safe
way to get rich – slowly. Everyone should hold a healthy
cash reserve to cover short term needs and contingencies.
But there are pitfalls if you are holding large deposits,
for example:
- Are you covered by a depositors’ protection scheme?
The US and UK have limited guarantees; deposits in Indonesia
are backed by the government but some countries such as Singapore
offer no protection.
- Is there a risk of the currency of your deposit falling
in value? This does not just apply to the Rupiah but in recent
times the USD which fell by as much as 40% against the GBP,
Euro and AUD.
- Are you comfortable with your money not growing in ‘real’
terms, that is, purchasing power?
Stocks, shares, equities or funds that invest in them
This is the essential asset class for long term growth as
it represents the capital markets of the world. Companies
from MacDonald’s to Microsoft and Airbus are in business
to make real money for their shareholders. If you don’t
own shares in one form or another you are ‘out of the
game’.
But you must be aware of the downside.
- Equities generally rise in the long term but can have sharp
reverses in the short term.
- ‘Bear markets’, that is, falling markets can
sometimes last for long periods, such as from March 2000 to
March 2003.
- Beware of investing in one stock. You might pick an Enron.
Nor should you go for one sector because it is the ‘flavour
of the day’. Those who went too late into technology
stocks lost up to 80%.
Savings and pension plans
Few expats in Bali can look forward to pensions from their
home countries so it is essential to have some form of private
pension plan based in a safe offshore jurisdiction. A grim
future faces those without a plan. But for someone without
a steady income, committing to a long term plan can prove
costly if contributions are not maintained.
Property
This has become the darling of investors in recent years as
property values have soared in many parts of the world. Some
are abandoning other forms of investment and pouring everything
into real estate. I believe everyone should have some property
but as with every other investment there is a danger in putting
all one’s eggs into the same basket. Here are some of
the downside aspects:
- Right now there is a property boom. Booms can be followed
by busts.
- Property prices tend to fall as interest rates rise.
- Rental income cannot be guaranteed and an empty property
can be expensive to run.
- If you suddenly need cash you cannot sell a bathroom.
- You may not have legal certainty in some jurisdictions.
Your own business
This is the dream of many; all around Bali we can see examples
of those who have fulfilled that dream! But it is not all
plain sailing as many of them will testify. Bill Gates may
have made it but before you try to emulate him consider:
- Most small businesses (up to 80%) fail within the first
five years.
- Being a successful chef, teacher, pilot or fashion designer
is one thing, managing a business is another as it requires
very different skills.
- Before you go into a business venture write down all the
things that could possibly go wrong. If you are in the tourist
industry that should not be too difficult!
But don’t let the downside put you off!
Making mistakes is part of the learning process. Few people
succeed without first failing. But with a little bit of planning
and foresight those failures can be avoided or minimized.
Don’t be afraid to save, invest or go it alone because
of the pitfalls. Just be aware of them and keep looking on
the bright side!
Colin Bloodworth is a senior adviser with Financial Partners
International. The views expressed are his own. No investment
decisions should be taken without proper advice. If you have
any questions you may contact the writer at 021 520 8099 or
colin.bloodworth@financial-partners.biz.
