LESSONS FROM A SURPRISING YEAR – BUT WHAT LIES AHEAD?


Let’s wind the clock back to January 1st 2017. Prospects for the world and for investors looked grim. Trump was about to start his term as US President threatening all manner of chaos (he has not disappointed), Kim Jong-un was threatening to up the ante with bombs and rockets (again, he has not disappointed), the reality was creeping in over Brexit and we had the never-ending conflicts in the Middle East.

 

But despite all this the year (so far!) has turned out to be the best for investors since before the Global Financial Crisis nine years ago. Such is the perversity of the financial markets. For this issue I would like to run through the articles I wrote each month (two in August) and review their relevance now we are reaching the end of the year.

 

January: How charges can damage your investment returns

As most markets have performed strongly this year the impact of charges (which can be as high as 3% per annum or more) has been less notable. But when returns fall again we will see once more that charges can turn small gains into losses. Fortunately there are now viable alternatives to the higher-charging products and the end of the year could be the best time for investors to explore what alternatives are possible.

 

February: Investing – Staying safe in an unsafe world

This article touched on the worrying events threatening the world but also the opportunities. It identified the return of inflation as a future threat and why you cannot rely on annuities and frozen pensions to maintain the same standard of living from year to year. It also warned about the perils we experienced after the financial crisis of turning to speculative ‘alternative’ investments as a means of generating higher returns. Suitable alternative investments do exist but they must be completely liquid and must not be based on speculative assets.

Finally, staying ‘safe’ doesn’t mean avoiding all risk and keeping all your savings under the mattress or in a low interest deposit account. Inflation will eat away at your savings just as the mice will eat the money under the mattress. Taking no risks at all is a risk in itself!

 

March – Coping with compliance

Compliance hasn’t gone away since March. It is likely to be with us for ever. Some pointers to ensure you are well prepared include:

  • Make sure you always have available good copies of your current passport. Leave room on the copies for certification.
  • Proof of address can be even more problematic in Bali due to the fact that some homes do not have a physical address. Preferred are utility bills, a recent bank or credit card statement. Certified copies of a KITAS, KITAP or KTP or an employer’s letter may be acceptable.
  • Tax residency declarations are now universal so make sure you have a TIN available or a good explanation as to why you don’t have one.
  • Proof of source of wealth. Be prepared to provide details and evidence. Retain copies of work contracts, payslips, property sales contracts etc.
  • Make sure you have easy access to a lawyer, accountant, notary or financial adviser who can certify documents for you.

 

April – Planning for financial disruption

Technological disruption is advancing at an alarming rate, with benefits for many but it is also destroying millions of jobs. We are seeing cash gradually disappearing as a means of transacting business (simple example – the automatic toll gates) and the encroachment of ‘cybercurrencies’ such as Bitcoin which threaten all manner of disruption to the financial system.

 

May – Time to pile into emerging markets?

After years of losses and underperformance all the indications still point to emerging markets being undervalued and ready for another strong rally, with the caveat as always that they are subject to greater volatility than developed markets.

 

June – Which asset will produce the best return?

If you know the answer and could get it right every year you would be very rich indeed. The fact is that positions in the ‘league table’ of assets change every year much faster than those in a football league. This year’s winner could easily be bottom of the league next year. Hence the wisdom of diversification and maintaining a balanced range of assets over the years.

 

July – Will the ‘Rule of 72’ wipe out your savings?

The rule of 72 is a method used in finance to quickly estimate the doubling time of an investment through compound interest or loss of purchasing power through inflation. Let’s say you have an investment that grows at 4% per annum with the interest rolled up. If you divide the magic 72 by 4 the answer is 18. Therefore you can say that your investment will double in 18 years.

You can also see why cash is currently a poor option. If you are getting say 0.5% interest on your USD or GBP deposit account it will take you 72 divided by 0.5 = 144 years to double your money at current rates!

 

August (1) – Time, not timing is what matters

This was the story about the hare and the tortoise. Warren Buffett is a good example of the latter. His strategy of careful selection of investments based on value and holding them for the long term has proven far more successful than leaping from one investment to another.

 

August (2) – All expats likely to be affected by CRS

As little as a year ago no-one would have thought this possible but it is now a fact that most countries in the world have agreed to the automatic exchange of tax and financial information on individuals.

The global agreement that has brought it about is known as the Common Reporting Standard (CRS). Its purpose is to combat tax evasion which has long been a global problem.

For Indonesia it is a major coup as it should increase revenue for the benefit of the country. For expats it means that assets held overeas no longer benefit from the confidentiality they once enjoyed.

 

September – Storm devastation – could it happen here?

Hurricanes affecting the US and the Carribean were a wake up call for all of us to ensure we have adequate insurance for life, health and property.

 

October – Financial predictions – should we believe them?

This article related a cautionary tale about the use of wild predictions to attract customers. In one subscription newsletter the writer urged readers to sell gold immediately as the price was about to fall through the floor. It didn’t. Four months later the same writer warned the US Dollar was about to collapse and to urgently buy gold! The dubious ‘predictions’ of Nostradamus were also mentioned.

 

November – Is it time to take our chips off the table?

This article summarised the presentations of a number of leading fund managers and economists at a think tank in London earlier in the month. The speakers’ overall view of the markets was that investment conditions were still favourable although some measures should be taken to       prepare for an eventual correction. In short, the chips should stay on the table but with a few adjustments.

And that is where we stand as we approach the end of the year. Do let me know if you have any related questions or concerns.

Have a great festive season and may 2018 be a happy and prosperous year for you.

 

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. If you have any questions on this article or related topics you can contact him at colin.bloodworth@ppi-advisory.com, colin.bloodworth@yahoo.co.uk or +62 21 2598 5087

 

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Copyright © 2017 Colin Bloodworth