A Return of1% or300%?
It'sYour Choice - and Riskl!lr:m:mm':l~lr.

"you playsa'e, what should you expect?
Bank deposits are close to "ris k free" butifyour money is in US dollars, British
pounds or euro you will be lucky to earn
1perc ent pe r annumin the current low
int erest rate environment. If you deposit
funds in rupiah you can exp ect a higher
return, currently 5 perc ent or more, but if
you are converting from a major currency
you have to watch out for currency movem ents. As a rule of thumb you sho uld staywith the currency in w hich you h avecomm itments.
Gove m ment bonds: 1.3to 27.5 percent
Government bonds are am ong the safes tof inves tments because govern ments canalways print money to meet th eir obligations. The exception is Europe where thecurrency is m anaged by the European
Central Bank.
Con sequently, we h ave an absurd situation where, at the time of writing, youcould invest in Euro bonds in Germany
and earn only 1.3percent per ann um or in
Spain where you can earn a h and some6.9 percent. If you buy the bonds fromGreece you will earn a whopping 27.5 percent!The equivalent rate for Indonesianrupiah bond s is currently 5.8 percent.
So why would anyone wish to invest inGerman bonds for a miserable 1.3percen t? The answer is investors are confident they will get their money back whileth ere is a risk th at Gree ce or Spain wi ll
defa ult and th eir money willbe lost.
Investors also feel safe with US,British , Japanese and Swiss bonds, all ofwhich are currentlyyieldingless than 1.5percent pe r annum for a lO-year ter1l1.

hy w ould some people
be happy with a1percent return on
their money whileothers aim for 300
percent or more?
Keeping in mind that risk increases
with expected return what should you
realistically be looking for?
ManywouJd be happy with a10 percent return, provided that the capital was
absolutely safe and acces sible at all times.
Unfortunately there is no investment thatcan meet all three criteria Some investments have guarantees but they are only
as good as the institution or country pro vidingthem. In 200 8 the Irish government issued a blanke t guarantee on allbank deposits to ste rn the flight of moneyfrom troubled Ir ish banks but it wasquickly followed by a qualifying sta te ment to the effect thatthe guarantee wassubject to th e country's ability to honor it.

1.5 percent is underthe inflation rate
Correct. And that m eans investors are
actual ly lending their money to governments kn owin g they w ill get back less inreal terms. But for many thi s is prudent
mo ney management.
Ifa pension scheme, for example, isinvesting fund s for thousands of employees it has to be sure it can meet its obligations to payout pensions in full and as
they are due. This is where bonds playa
major role and why zero real returns are
acceptable to many people.
What's available if you acceptsome risk?
The sky is the limit but let's review what
realis tic opp ortunities exist.
• Corporate bonds: Companies areprepared to offer high er yields thangovernments in order to attract capital.
Returns of 5 percent to 8 percent per
annum would be typical . Bond mutual
funds offer easy access but keep inmind that cap ital values can fluctuate.

• Equities and commodities: Potential returns are not easy to quantify as
there are many var iables, but over thelong term, an investment in a wide
ran ge of global stocks and commodities should produce returns in the 6
percent to 10 percent (per annum).
range, though returns call be erratic.
The past 12 years have not been goodfor the major markets, though very
good for gold.
• Real es tate: An investm ent in realestate should pro duce a return comparable to equities. But w hile'stocks are ,highly liquid , a real estate investment
cannot be turned easily into cash andcan be a serious burden sh ould you
need to sell at th e wrong time. Still, abuy-to-let investment should return
betw een 5 percent an d 10percent
annually, depend ing on location, plus
hopefully, an eventual capital gain.
What gives routine positive returns?
The last few years h ave produced sparse
returns for investors. This has led many toseek investments thatproduce consistently positive returns. Ironically, thebanking cris is of 2008 has provided
opportunities for smal l investors to step
into the role of bankers and invest in
funds that lend to industries and groups.
Exan1ples are agricultural lending, mortgage lending, stu dent-accommodationand litigatio n funding. Current returns
are in the regio n of 6 percent to 12percent
per ann urn but they can be h igher.The
biggest risk here is liquidity.
Whe re are the really high returns?
This wo uld be th e do main of private
equity, which entails investing in projects
or sometimes com panies in distress, afield formerly ope n to only the ultrawealthy. In successful cases returns toinvestors have exceeded the annual
equivalent of300 percent
Is there a downside? Yes,if the project
is not successful you can lose all yourmoney! Much the same risk as ifyou
invest in your own business.
What should an ordinary Investor seek?
It depends on m any factors but a sensible
str ategy would consist of a blend of theabove asse t classes, excluding the last one
for mostIfyou can consistently achieve anannual return of between 5 pe rcent and
10percent above the inflation level, you
are doing wel l.
If you are aiming for returns of 300
pe rcent, go ahead, but only do it with surplus money th at you are prep ared to lose-,........ ........... ................. ..... .. ... ........ .... ...... ....

Colin Blood worth is the president director ofProfession al Portfolio Int ern ation al Indonesia.