Like many do in Bali and even far afield I frequently glance at one of the YouTube offerings that provide live shots of Gunung Agung. On the evening of Friday 24 May my timing was spot on as I caught a brief eruption which was highly visible thanks to clear skies. There was also a screenshot of the ash cloud that soon passed over Denpasar, including Sanur and Kuta and of course the airport, causing immediate disruption of flights.
Fortunately the eruption was short-lived but it reminded me of the first and larger eruption of the present series in September 2017. That one resulted in several days’ disruption of flights and publicity that adversely affected tourism for several months. Happily the vast majority of businesses eventually recovered in full but how many are ready for another and potentially larger disaster, natural or man-made? Fingers crossed it may never happen. But if it did, to what extent would it affect your livelihood? If the answer is massively then you should be thinking about diversifying or allocating spare cash as best you can and while you can into other assets, if only a large cash reserve for emergencies. And of course make sure you have insurance in place to cover potential risks.
Businesses don’t need disasters to make them fail
They say why work for someone else when you can make more money working for yourself? It’s true that few will make a fortune in regular employment and to really hit the jackpot you must work for yourself. Bill Gates, the late Steve Jobs and many others would agree. But millions of other entrepreneurs have not found it so easy and have gone to the wall despite hard work and a successful product. More often than not failure can result from the rapidly changing needs and preferences of consumers, not to mention ‘disruptive technology’ which is constantly changing and even destroying the shape of the high street. Companies like Amazon are putting thousands of stores out of business all over the world. Smart phones have made internet cafes and photo-developing shops totally unnecessary. The list is endless. But the advice is the same; don’t put all your money into a business that could be outdated in a couple of years.
Property – the most desirable yet most worrying asset
Not owning a property is many people’s greatest regret, especially during periods when property prices rise to dizzying heights. Yet many property owners would desperately like to free themselves from the burden.
For most people not owning a property means being condemned to paying rent for the rest of their days. Savvy landlords will have borrowed money to buy the property and you, the renter, are effectively paying off the loan so you are paying for an asset that the landlord will one day own for himself.
On the other hand, there will be those living in properties for which they borrowed money and now have difficulty in repaying due to changed circumstances. Some may need to move for a variety of other reasons but cannot because they are unable to sell their property. Those who have bought ‘buy-to-let’ investment properties may have problems finding tenants or may have tenants that they wish they didn’t have.
If all the above see themselves as losers, who are the winners? In the long term the vast majority of property owners are winners. They will have paid off their loans and seen a significant rise in the value of their properties. But to get to that far point requires a lot of prudence in the earlier years. While it may be tempting to commit everything and borrow heavily to acquire a dream house it can end up in tears if a loss of job or serious illness affects the ability to pay off the debt. Far better to start off modestly and gradually move up the chain as cash grows and incomes rise.
Financial investments – fortunes to be made?
Why lock up your money in property when you can invest in financial instruments that you can quickly cash in? Why not throw everything you have into the latest flavour of the day, cryptocurrencies? Some people have made gains of several hundred percent in a matter of weeks. But those are the cases you hear about. You don’t hear very much from the thousands who have lost small fortunes by jumping on the bandwagon at the wrong time. Even a long-established asset like gold can be a problem if you commit too much to it. I recall some time ago a client pressing me to switch all his investments into a physical gold fund when the price of the metal was rising rapidly. I showed him a historical price chart and how after reaching a peak it often falls as it did in 1980 from around $800 to as low as $260 an ounce and did not reach its 1980 level again for a quarter of a century. He wisely agreed that 25 years to wait for a recovery was a long time so settled for a smaller allocation. Gold came close to $2,000 an ounce in 2011 but soon fell sharply again. Today at the time of writing it stands at $1,285 an ounce. It still remains a good hedge against major political or economic disruptions and merits a small (say 5%) allocation, purely as insurance, within a portfolio.
Stock markets, like property, are a good investment provided you stick with them for the long term. But they should be diverse, and not concentrated into just a few stocks or asset classes. You may make more money if you pick a single winner but can lose everything if the sole company you have invested in goes to the wall.
So the best investment of all is….tulips??
Answer: There is no best investment overall! In any given year there will indeed be one, but for any asset class to be top of the list even two years in a row is extremely rare. So if you were tempted to sell up all your possessions and place the proceeds into any particular year’s top-performing asset which might be gold, the latest high-flying technology share, Bitcoin, properties in Bali or even tulip bulbs, be well prepared to see a reversal of fortunes the following year. But if your eggs are in several baskets you will surely sleep more soundly.
I mentioned tulip bulbs because they are considered to have been the first known example of a financial crash. Why on earth tulip bulbs? Because tulips had become very popular in paintings and festivals in Holland in the mid-seventeenth century, so much so that they created an economic bubble, known as “Tulip-Mania”. In 1636 as people feverishly bought up bulbs they became so expensive that they were used as money until the market in them crashed the following year. Keep this in mind next time you see an investment that is doing so well that you want to plunge your life savings into it. And finally if you want to (and were allowed to) build a luxury villa or restaurant on the slopes of Agung, make sure it represents no more than 1% of your assets. And that you have a good escape route.
Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly.
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