(Article for the Jakarta Globe – 6 Aug 2012 issue)
MONEY WISE
1% OR UP TO 300% ANNUAL RETURN ON INVESTMENT – THE CHOICE IS
YOURS!
Why would some people be happy with 1% return on their money while others
will aim for 300% or more? Keeping in mind that risk increases with expected
return what should we realistically be looking for?
Many would be happy with a 10% return, provided that the capital was absolutely
safe and accessible at all times. Unfortunately there is no investment that canmeet all three criteria. Some investments have guarantees but they are only as
good as the institution or country providing them. In 2008 the Irish government
issued a blanket guarantee on all bank deposits to stem the flight of money fromtroubled Irish banks. But it was quickly followed by a qualifying statement to theeffect that the guarantee was subject to the country’s ability to honour it.
If we want to ‘play safe’ how much should we expect?
Bank deposits are close to ‘risk free’ but if your money is in US Dollars, Pounds
Sterling or Euro you will be lucky to earn 1% per annum in the current low interest
rate environment. If you deposit funds in Rupiah you can expect a higher return,currently 5% or more, but if you are converting from a major currency you have towatch out for currency movements. As a rule of thumb you should stay with thecurrency in which you have commitments.
Government Bonds – your choice of return: 1.3% to 27.5%
Government bonds are among the safest of investments because governments
can always print money to meet their obligations. The exception is Europe where
the currency is managed by the European Central Bank. Consequently we have anabsurd situation where, at the time of writing, you could invest in Euro bonds inGermany and earn only 1.3% pa or in Spain where you can earn a handsome 6.9%.
If you buy the bonds from Greece you will earn a whopping 27.5%! The equivalent
rate for Indonesian Rupiah bonds is currently 5.8%.

So why would anyone wish to invest in German bonds for a miserable 1.3%? The
answer is investors are confident they will get their money back while there is arisk that Greece or Spain will default and their money will be lost. Investors alsofeel safe with US, British, Japanese and Swiss bonds, all of which are currently
yielding less than 1.5% per annum for a 10 year term.
But 1.5% is less than the rate of inflation
Correct. And that means investors are actually lending their money togovernments knowing they will get back less in real terms. But for many this is
prudent money management. If a pension scheme for example is investing funds
for thousands of employees it has to be sure it can meet its obligations to pay out
pensions in full and as they are due. This is where bonds play a major role andwhy zero real returns are acceptable to many.
What returns are available if we accept some risk?
The sky is the limit. But let’s review what realistic opportunities exist.
Corporate bonds: Companies are prepared to offer higher yields thangovernments in order to attract capital. Returns of 5% to 8% pa would be typical.
Bond mutual funds offer easy access but keep in mind capital values canfluctuate.
Equities and commodities: Potential returns are not easy to quantify as there aremany variables but over the long term an investment in a wide range of global
stocks and commodities should produce returns in the region of 6% to 10% pa
over time, but returns can be erratic. The past 12 years have not been good forthe major markets, although very good for gold.
Real Estate: An investment in real estate should produce a return comparable toequities. But while stocks are highly liquid a real estate investment cannot beturned easily into cash and can be a serious burden should you need to sell at thewrong time. Still, a buy-to-let investment should return between 5% and 10% pa
depending on location, plus hopefully, an eventual capital gain.
What investments can produce regular positive returns?

The last few years have produced sparse returns for investors. This has led many
to seek investments that produce consistently positive returns. Ironically, thebanking crisis of 2008 has provided opportunities for small investors to step into
the role of bankers and invest in funds that lend to industries and groups.
Examples are agricultural lending, mortgage lending, student accommodation andlitigation funding. Current returns are in the region of 6% to 12% pa but can behigher. The biggest risk here is liquidity.
Where are the really high returns?
This would be the domain of private equity, which entails investing in projects orsometimes companies in distress, a field formerly open to only the ultra-wealthy.
In successful cases returns to investors have exceeded the annual equivalent of300%. Is there a downside? Yes, if the project is not successful you can lose all
your money! Much the same risk as if you invest in your own business.
So what return should an ordinary investor be seeking?
It depends on many factors but a sensible strategy would consist of a blend of theabove asset classes, excluding the last one for most.
If you can consistently achieve an annual return of between 5% and 10% above
inflation you are doing well. If you are aiming for returns of 300% go ahead, but
only with surplus money you are prepared to lose!

Colin Bloodworth

PPi Indonesia