Money Wise: Extinction Awaits Those Who Don’t Move With the Times — Just Ask T. Rex

By webadmin on 09:17 am Jun 19, 2012
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Colin Bloodworth

For 150 million years the dinosaurs ruled the world. No creature could compete with them. But 65 million years ago they vanished as a result of a presumed asteroid strike or huge volcanic eruption. Unlike smaller creatures, they could not survive on the limited food supply that was available following the catastrophic event. They perished because they could not adapt.

The business world has also seen its dinosaurs.

Corporate history is littered with examples of former successful companies and industries that failed to adapt to changing needs. Some still survive, such as Kodak, but in a much smaller form than its original self. Once the giant in the world of photography, it failed to keep pace with the newcomers in the digital age. Until fairly recently General Motors, once one of the largest companies in the world, was still making traditional “gas-guzzling” cars, oblivious to the financial crisis and the rise in the price of oil. It could have gone under, but after a government bailout and major restructuring, it emerged leaner and fitter with new models adapted to a changed market.

In the world of computers and gadgets, companies have to adapt quickly. Samsung is rising fast, Apple may have reached a peak while, BlackBerry makers Research In Motion and mobile phone maker Nokia are losing their market share. The dinosaurs survived for 150 million years; survival times now can be as short as a decade or two.

Job for life? — Forget it.

There used to be an assumption that if you trained in a particular skill or profession, your future would be guaranteed. Nothing could be further from today’s reality. Putting together a newspaper used to be the task of skilled compositors; with the advent of computers, the skill became outdated. In Europe there are no more chimney sweeps as central heating has replaced the coal fires. Postal workers and secretaries haven’t disappeared but numbers have drastically reduced as e-mails have reduced their roles.

The message for anyone starting out in a career is to be prepared for change. Future success will depend not just on education and skills but the ability to adapt quickly to changes.

The same goes for retirement.

If you are relying on old concepts of retirement planning you are going to have a rude awakening.

In most Western countries it was assumed that your contributions to state and private pension schemes would ensure a comfortable retirement. Due to changing demographics and increased life expectancies, countries can no longer support growing populations of retirees. Some are introducing higher retirement ages to delay the payment of pensions, which does not sit well with the public. In France, workers frequently go on strike to protest the loss of benefits, which are helpful to everyone. British expatriates who wish to retire to Indonesia, Australia, Canada or a number of other countries are further punished by having their pensions frozen for life, even though they paid full contributions during their working lives. They will have to adapt to a shrinking real income.

Private company schemes in the US and Europe are under-funded due to increased costs and stock market losses. So-called “defined benefits,” or guaranteed pensions, have all but disappeared.

In Indonesia and most developing countries, there is little or no state provision for pensions and little comfort from the private sector. What makes these countries different from the West is traditional family support. But even this is disappearing with urbanization and the shifting of populations. Poverty is a reality that many people will face in old age.

To adapt to these changes we all need to face the fact that much more should be put aside throughout our working lives to prepare for retirement. There is little you can do if you do not address the issue until you are 50. If you finally realize you have a problem at 65, it is too late.

Investments have also changed.

If you have a portfolio of investments and haven’t seen it for a while, you may be in for a shock. Most major markets have made little or no advances since 2000. If you have been blindly following a major index, it will have gone nowhere. After charges, the picture is even worse.

The old portfolio model of cash, stocks and bonds is not working. It doesn’t mean these assets should be abandoned. Cash and bonds are still essential to provide liquidity, even if they make little or no money in real terms. Stocks are also essential to ensure participation in global growth, slow as it may be. However, a more careful selection of stocks is necessary, with a focus on those that offer value and pay regular dividends.

But something is needed beyond the traditional asset classes. Even the so-called “modern portfolio theory” of Harry Markowitz failed to deliver in the crash of 2008. What is needed perhaps is the inclusion of an even wider range of assets, particularly ones that produce predictable returns and are not correlated with the financial markets. The downside is usually liquidity but this should not be a problem if the time frame is long term.

The failure of US and European banks in 2008-09 has actually led to a host of new opportunities for small investors.

No room to elaborate here but the point is that fund managers, pension scheme committees and individuals need to take a more proactive approach if they want to achieve real returns in a changing world.

We cannot sit on our hands and watch the world go by. We have to be prepared for change and to adapt swiftly to it if we are not to go the way of the dinosaurs.

Colin Bloodworth is the president director of Professional Portfolio International Indonesia.