Smart Money: Investing vs. Inflation

How investors can protect themselves from the effects of inflation

There’s a saying that inflation is a tax against your savings, and this is very true. When the value of currency goes down, the ‘buying power’ of the money you’ve saved also decreases. So while you have the same amount of money, you are, in effect, poorer.

Hence, there’s another popular saying that goes something like “don’t save your money, invest it”. Of course, the premise is that investments need to be returning higher than the rate of inflation (i.e. if the inflation rate is 5% you need your investments to be making more than 5%).  Therefore, an investor is able to grow their money faster than the effects of inflation, keeping the investor ahead of the curve.

So what should you do during inflationary periods?

Steer clear of having your funds invested in cash. The reason for this is that inflation is linked to rising prices. If you have $100 in your wallet now, you can buy a certain amount of goods or services. If inflation pushes the price of those products up to $110 next year, you won’t be able to buy as much with your $100. If you hold this money in a bank account that pays no interest, the result is the same.

However, most banks pay interest, so your $100 would grow over time. And to combat inflation, banks raise their interest rates to encourage saving over borrowing or spending. Unfortunately, banks won’t raise their interest rates above inflation, so the real interest rate you’re exposed to – the nominal rate offered by your bank minus inflation – will always be negative. For example, your bank pays you 4% interest on your savings but inflation is 5%. So the real interest rate for your savings is -1%, which means their purchasing power will decrease by 1% per year.

Look for investment options returning above inflation rates.

This is easier said than done because returns are not guaranteed but there are options out there that will be offering above inflation returns.

However, not all investments are the same. Some require more attention than others, while some, by their nature, require huge capital upfront. Understanding your current situation and investor profile is crucial when selecting which investments match your financial goals. Otherwise, you could end up suffering big losses instead of gaining additional income.

Markets will always have highs and lows. What’s important is that the general trajectory is moving in your favour in the long term. And if something unexpected happens, you know how you can exit and minimise your loss.

Research and ask as many questions until you are satisfied. Investing should protect you from inflation, not compound the problem because you entered into something you didn’t completely understand.

About APG’s pooled mortgage fund: Who is it for?

APG’s pooled mortgage fund is used to finance a range of loans for small and medium-sized enterprises (SMEs) and property development. Typically, we maintain an average of 30 secured loans in our portfolio at any given time. Investors receive quarterly distributions based on the interest payments made by borrowers within the loan portfolio.

This setup ensures immediate diversification since your investment risk is spread across numerous loans. Even if one borrower defaults, other loans in the portfolio will continue to perform. For more details on APG’s loan recovery and risk management process, refer to our article: “Investor FAQ: What occurs in case of borrower default?”

Investors have the option to receive their quarterly distributions as passive income, making it particularly appealing for those seeking to expand their income streams.

For individuals with long-term objectives, there’s the opportunity to reinvest the distributions to amplify their interest through the Distribution Reinvestment Plan (DRP).

The pooled mortgage fund is a true, set-and-forget passive investment opportunity. Our fund manager handles all aspects, including sourcing borrowers, conducting due diligence, and loan management (making sure it’s paid back on time). We provide investors with regular updates on the fund’s performance, and all relevant documents are easily accessible for download on the investors’ portal.

Investors who lack the time to oversee their investments closely may find pooled mortgage investments appealing. The fund manager does all the hard work, and they can either earn passive income, or compound their interest for larger long-term gains.

The minimum investment of a pooled mortgage fund is $10,000 for retail investors, and $25,000 for wholesale investors. This means that the barrier to entry isn’t as high compared to other popular investments like real estate.

Moreover, investing in APG’s collective mortgage fund doesn’t entail a lock-in commitment. Investors have the flexibility to stay invested until they decide to redeem their units. It’s important to note that at APG, redemptions are processed quarterly. Investors interested in redeeming their units should submit their redemption request at least 3 weeks before the quarter’s end.

Granted, the pooled mortgage fund is not for everyone. For investors who prefer a closer involvement with their investments, the pooled mortgage fund may not fit to their liking because of its passive characteristic.

More experienced investors might prefer having the option to select the loans to be included in their portfolio to maximise their ROI. This is especially true for investors who are willing to take on more risk for higher rewards (e.g. investing exclusively in second mortgages), compared to the more conservative approach of the 75%-25% split for first and second mortgages in APG’s loan portfolio.

So, examine your investor profile and assess whether or not our pooled mortgage fund aligns with your risk appetite and financial goals.

If you are interested in APG’s pooled mortgage fund, feel free to book a call and our investor relations team will gladly answer any of your queries.

The information in this article is of a general nature and does not constitute professional advice. Always seek professional advice in relation to your specific situation.
The returns mentioned are not guaranteed. You risk losing some or all of your investment. If you have any questions about investing in private mortgages then please send us an email [email protected] or message us via our Contact Page.

If you have any questions about investing in private mortgages then please send us a message via our Contact Page.