The chances are that most expat readers have some form of
savings plan. Savings can take the form of anything from that
piggy bank you had when you were little (did anyone tell you
about the interest you were losing?!) to life long contributions
to a pension plan. The fact is, unless you are extremely wealthy
you are unlikely to achieve your goals in life without some
form of savings activity.
Why do people save?
There are many reasons but here are some of the more common
ones:
- school fees
- higher education costs
- holidays
- a car
- deposit for a house
- financial independence
- start a business
- retirement
What savings vehicles are available to us?
Again, there are many options, from the silly to the serious:
- piggy bank
- swear box (!)
- bank deposit account
- building societies or similar
- regular savings into mutual funds, unit trusts, etc.
- unit-linked savings plans with life companies
- investment-linked life insurance policies
- company pension or superannuation plans
Which is right for you?
Much depends on your circumstances. The composition of the
expat community in Bali is very different from that of Jakarta
or other major cities in the world. Expats working for large
companies usually belong to a company pension plan or they
enjoy salary levels and a degree of job security that enable
them to commit to long term private savings and pension plans.
Company schemes are usually the best because the generally
pay predetermined benefits such as a guaranteed percentage
of final salary. These schemes are generally disappearing
however since they have become too costly to companies over
the past few years.
The benefits of a long term savings plan
For the individual who can afford to put aside a sizeable
part of his salary (ideally 15% - 20%) for at least 15 years
the rewards can be significant. For example, a monthly contribution
of US$1,000 into an investment plan of one of the major offshore
life companies based in the secure jurisdiction of the Isle
of Man would be worth US$293,281 in 15 years’ time assuming
a modest annual growth rate of the underlying funds of 6%.
If the growth rate is 10% the value would be US$408,553. Of
course, the rate of growth is not guaranteed. The actual growth
would depend on rates of inflation, economic and geo-political
factors, currency factors and choice of funds.
The importance of proper advice
Unless you have a complete understanding of all the above
factors it is vital to have proper initial advice. In one
of the worst cases I have seen an investor faced with a list
of funds to choose from selected one that had made over 50%
the previous year. He placed the whole of his investment in
the fund. Unfortunately the fund was a warrant fund; this
kind of fund borrows money to enhance performance. Fine when
the market goes up but disastrous when the market goes down,
as it did the following year resulting in the fund losing
around 90%. Ongoing advice is equally important. Funds that
may be appropriate in the early stages of a plan may be inappropriate
a few years later. One of the problems facing many long term
savers is that the person or company that originally sold
them the product is no longer around. The offshore financial
services industry unfortunately has attracted few advisers
who are in for the long term. As a result, many investors
become ‘orphaned’. On turning to the product provider
they will be alarmed to find out that the latter cannot give
financial advice. They can move your funds for you but they
will not advise you on selection or changes. If you are in
this situation our group may be able to step in and help.
The worst thing you can do is take no action and hope things
will sort themselves out by themselves.
Are there other pitfalls?
Apart from incorrect fund selection or failure to adjust from
time to time there are indeed many pitfalls and drawbacks
in respect of long term investment plans. This does not mean
they should be avoided, since they represent one of the few
ways you can build up a significant financial asset in real
terms, but they are not suitable for everyone and must be
fully understood. I will elaborate on this in a following
article. I will explain why some people are showing paper
losses in their savings plans and what options they have to
cut losses or move into profitability.
Colin Bloodworth is a senior consultant with Financial Partners
International. The views expressed are his own. No investment
decisions should be taken without proper financial advice.
If you have any questions you may contact the writer at colin.bloodworth@financial-partners.biz
