Some time ago I had a call from reception informing me that I had a visitor. I recognized him to be a driver who worked for an oil company I was with more than 20 years ago. After exchanging a few pleasantries, he broke down and related how he was now jobless, destitute and desperately needed help to survive.
I recalled that when he left the company, the “pension” for retiring employees was just a pesangon , or lump sum, which related to final salary and length of service. There was no regular income to follow, even after a lifetime of service. As for expatriate employees, company pensions are rarely provided outside one’s home country, so pensions can be a very significant issue.
A fact of life is that relatively few people anywhere are making adequate provision for their later years. So what should we be doing about it?
When not to invest for the long term
Long-term investing means making commitments. Before doing so, it is essential to have enough cash, because running out of cash can spell ruin. This also means you cannot think of saving for the long term if you are heavily in debt. One of the most common traps for consumers is credit card debt. It is hard to get by in the modern world without a credit card, but if you do not pay your bills on time and in full, you can be subject to outrageous interest charges, as high as 40 percent per annum.
Where should you invest your money for the long term?
While it is clear that a healthy cash reserve is essential, cash is not the answer in building up long-term savings. Interest on cash deposits in most currencies is insufficient to keep pace with real inflation. If you place a large sum of cash on deposit now, chances are that in 20 years’ time, even with interest, it will buy half of what you could buy with it today.
So where should long-term money go? Let’s take a look at some of the options:
• Land: This is undoubtedly a sound and profitable investment for the long term. But be prepared for potential disputes, planning problems and the time it might take to sell.
• Property: Everyone’s dream is to own a home, and rightly so. For most people, this is the biggest investment in their lives. Owning additional property as an investment can also be highly profitable, but it must be seen as long term.
• Own business: If you are a potential Bill Gates or Steve Jobs, read no further. But the sad fact is that most businesses fail within five years. It takes a lot of skill, and luck, to run a successful business.
• Stocks: The building blocks of the capital markets. But short-term speculation is risky; look long term and ensure you have a broad portfolio of both international and home country stocks.
• Gold and other commodities: Supply and demand will ensure that these assets hold their value over the long term.
• Structured products: Generally a safe way to protect your cash for the medium term and share in gains if stock markets rise over the period. But bear in mind that the guarantees are only as good as the bank that is underwriting them.
• Collectibles and alternative options: There are many opportunities here, but mainly for more experienced investors.
Above all, diversify!
Perhaps the greatest mistake people make is putting all, or most, of their eggs in one basket. You may be lucky and choose a basket that doesn’t fall, but is it worth the risk?
And as for the retired driver who came by my office? Well, I gave him a bit of money and he called back two or three more times. Since then, not a word. He is just one among millions worldwide who did not or could not invest for the long term.
If you are in a position to do so, it is never too late to start.
Colin Bloodworth is a financial adviser with more than 20 years experience in Indonesia and is currently the director of PPI Indonesia, International Financial Consultants, based in Jakarta. He holds a BA in modern languages from Birmingham University and is a member of the Chartered Institute for Securities & Investment. He has also worked in the oil industry.