"!'ft"l""'""'""""·------· "- .. '"~-~-"~~BANKING & FINANCE~·~··''.

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PPiColin Bloodworthof PT. PPI Indonesia has
spent over 20 years in Indonesia. If you haveany questions on this article or related topics
you can contact him at 021 2598 5087 or colin. ·bloodworth@ppi-advisory.com
Eurozone and countries such as
Germany with stronger economies
will not want to see their currencies
devalued. To be safe therefore you
would need to to place your depositwith several banks and to be ultrasafe, even in other countries.

So where can you safely keep
your money free of charge?
Under the mattress is one solution
and that's not a very good one!
Neither was the idea of one
Japanese gentleman who wasreported to have buried his cash
savings in his garden. It might haveworked except that he frequently
dug it up to check it, no doubt
drawing attention so that one day hefound it had gone.

Of course you couldn't. You would receive no income on
your money and you would have to pay the bank to hold it
for you. Absurd indeed, but this is the reality in Europe since
the European Central Bank unexpectedly cut its benchmark
lending rate to 0.05% in September, pushing deposit rates into
negative territory. These rates apply only to Euro but rates inother major currencies are also close to zero.
A decade ago it was possible toget interest rates of 5% or more ondeposits. Many wealthy Americans
would retire to Florida and live
comfortably on the interest ondeposits. A million dollars in thebank for example would give theman income of $50,000 a year. Not
any more. They have to look at otherways to produce an income or justdraw down their savings until there isnothing left. The problem is, if they
still draw down $50,000 a year theirsavings pot will be empty in 20 years.
And that doesn't take into accountinflation which eats away at thepurchasing value of the drawdown.
For Euro millionnaires it is now evenworse. Their money will be exhausted
even faster as they have to pay thebank 0.2% in negative interest every40

I UP.DATE ISSUE 4- 2014year. In the first year alone that wouldamount to EUR2,000.
No doubt if the depositor places alarge amount with a single bank aslightly more generous rate would
be offered. Here though there is arisk, albeit a small one, that the bankin question would fail, in which caseonly the amount guaranteed by therespective jurisdiction would bepayable. And even then only if thegovernment was solvent! In the 2008
banking crisis the Irish government
was close to insolvency. Iceland had
aleady collapsed, leaving depositorswith huge losses. Most governments
can honour their guarantees byprinting more money; in Europe thatis not possible as the same currency
is used by all the countries in theOf course, living in Indonesia you areprobably thinking what's the point
saving in dollars, euro or pounds
when you can still get a reasonable
rate of interest on Rupiah. That's fine
if all your expenditures are in Rupiah
although you will find inflation will
eat into your capital and the interest
will buy less and less if you enjoy awestern lifestyle. The main risk is the
reduced value of your capital relative
to hard currencies after devaluationssuch as we saw last year.

So where can we earn adecent rate of interest?
This is the challenge of investing andthere are plenty of ways to get higher
returns than in the bank - provided
you are prepared to accept a higher
level of risk. There is no escape fromthe principle that the higher the return
you are seeking, the higher the risk.
Let's just examine a few examples:• Bonds
These are basically simple
instruments where you lend yourmoney to a government, local
authority or company in returnfor its guaranteed return afteran agreed period and a regular'coupon' or interest payment.
Perhapsthe best known bond of allis the US TreasuryBond, generally
accepted as about the safest
investment you could find since it
is backed by the US government.
Except that around a year ago
political posturing almost led to~
BRIT':.~~~~·

a default as the US had reached
its approved debt limit. At the
moment of writing that debt now
stands, albeit for a fraction of asecond, at $17,855, 171,680,414
according to the website www.
USDebtClock.org which you maywant to check out to see how muchthe debt has risen since. Should
you be worried? You would be if
this was your credit card bill but theprinciples are the same. It's anothergood reason not to put all yourfaith and savings in cash and also
to consider where all that debt isgoing to end. The clock is indeed
ticking!
But, assuming US government
bonds are the safest asset, howmuch could you expect to earnwith them? Currently, if you
invested $1,000,000 in a 10-year
treasury bond you would receive
approximately $24,000 a year or$2,000 a month. Commit to a 30year bond and the amount rises tothe princely sum of $32,000 a year.
That is fixed and guaranteed for 30years. What if you want your money
back sooner? No problem, bonds
are freely tradeable but the priceyou get may be higher or lower
than the face value as it is affectedby prevailing interest rates. Only on
the last day can you be sure to getyour exact initial investment back.

higher the return the higher therisk of default.
• Stocks
If you are seeking income inretirement then there are ample'blue chip' stocks that pay regulardividends which are generally
higher than bond yields. Stocks are
more volatile than bonds howeverand dividends are not guaranteed.
Nevertheless, holding a wide rangeof stocks should see significant
capital gain over the long term in
addition to the regular dividends.
• Alternative investments
Low interest rates and theerratic performance of stock
markets have led many investors
to seek higher returns in lessconventional assets such as
student accommodation, landbanking, futures trading, litigation
funding, private equity and avariety of hedge funds. Some have
paid off well but there has also
been a high casualty rate in termsof fund failures and even frauds sostepping into these areas should
be limited to a relatively smallpart of a total portfolio. Goldpays no interest at all but can beconsidered a useful insurance
against the falling value of paper
money or political turmoil.
•There are many other bond types
available, most of them paying
much more than 2.5% but theProperty
This is an income-producing
investment favoured by many.
Coupled with capital appreciation,buy-to-let
investments
are claimed
to be the best
investment
out of all asset
classes over thepast 20 years in
the UK. Yields
can range from
4% to 8% per"The ideal scenario is one where youraccumulated wealth is sufficient togenerate an income greater than yourexpenditures. That is what we might callfinancial independence. And it is getting
harder to achieve."

INDONESIA

annum depending on location.
The cost of buying and furnishinghas to be taken into account andthere is no guarantee you will
always find tenants although one
leading management company is
now offering guaranteed rentals
irrespective of whether the property
is occupied, such is the strength of
the rental market in certain cities.
The yields may not be that high but
the icing on the cake with property
is the capital appreciation. But keep
in mind prices can also fall andyou can't turn a property into cash
overnight.

So what is the best strategy?
Firstly, unattractive as may be, it isimportant to have access at all times
to liquid cash so a good proportionof savings should be kept safely
in several banks. There are ample
opportunities to obtain higher rates
of return by investing in other assets
but as each asset has its own set ofrisks the wisest approach is always
to diversify. Never put all or most of
your eggs in one basket.
British expatriates with private
pensions in the UK can reduce future
tax liablities from over 30% to as low as
2.5% per annum by transferring to an
approved offshore QROPS, a windowthat could soon be closing. Certain
trusts can also reduce Inheritance Tax
liability so you can leave more of yourwealth to your family.
But first you need to accumulatethat wealth and it is clear from thecurrent interest rate environment
and the risks involved in seeking
higher returns that we all haveto save harder while we can. The
ideal scenario is one where youraccumulated wealth is sufficient togenerate an income greater thanyour expenditures. That is what wemight call financial independence.
And it is getting harder to achieve.

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