On a recent investor workshop we had a long discussion around the topic of passive investing with the main objective to learn how to generate consistent long-term returns. But the immediate concern was around dealing with “Wealth Enemy no. 1” - aka inflation. More so because the rate of inflation is far higher than the official data pretends it to be.      

This is not new to our investors. Instead, their focus was on learning about solutions to the problem.  With the corrosive impact of inflation silently eroding cash savings on a daily basis, they were in need of a suitable plan of attack. By the end of the workshop investors went away with a number of simple-to-implement and specific investment strategies within equities, secured loans
and property.     

But in our acute need to negate the erosion on our savings, we remembered that no investment should ever be considered to be failsafe.  

Take secured loans for example. I began investing in this asset class for high single-digit returns (typically 8-10% pa) and safety of capital that was secured by bricks and mortar: an attractive return with senior first-charge security, which is akin to the holy grail in the investment world. This works for me and I’m a big fan of the asset class – but on a selective basis.  

I also witnessed many other investors seeking the returns without taking care on the security side of the equation. Many unknowingly settled for inferior forms of security such as PGs and debentures to obtain the same high single-digit returns. In effect, this amounted to debt returns for equity risk. A bad deal, as depicted by the red dot in the chart 1.

Beware of the Red Dot - Risk vs Return in property-backed deals  
Don’t get me wrong, there is a place for more junior forms of security as well as equity deals - provided investors are made aware of their true risk profile and a commensurate return is given. As per the risk-return relationship shown in the chart.