P2P Lending: 10 months in

It has been 10 months since I’ve invested RM1,000.00, with the intent of dipping my toes into the world of P2P lending. It has been a remarkable experience thus far.

palm holding folded money

I sincerely appreciate the remarkable traits which are part and parcel of P2P lending such as, stability and predictability. In contrast, the volatility and the uncertainty of the stock market may be a bit too intense at times, especially in the last couple of months. I realised that I needed a breather from the stock market; one that would do me some good.

However, the opposing characteristics of P2P lending and the stock market, could compliment your investment portfolio by providing some uncorrelated diversification in your investments. This uncorrelated diversification ensures that when one asset class is unfavourably affected, the other asset class would not suffer the same fate.

In addition, the potential investment yield, from P2P lending, is also a charming feature as most of the notes/loans offer interests rates of more than 10% per annum. Hence, this is a factor which is appealing to investors, other than traits such as, non-volatile and fixed income.

screenshot of funding societies malaysia account

My last deposit was made on 05.04.2018, in the amount of RM1,000.00 thus bringing the size of my P2P lending portfolio to RM3,000.00. Currently, my portfolio consists of 18 notes/loans, which provides good diversification and a yield of 11.50% in terms of annualised return. In monetary terms, that is RM148.84, in interest. It should be noted that most of the interest accrued are from the initial investment of RM1,000.00, and not RM3,000.00.

On the other hand, I’ve only paid RM26.68 in service fees.

The effect of compounded interest on my portfolio is also becoming more pronounced. That effect is achieved by reinvesting every cent of interest so that more interest could be earned, and later, reinvested again. Hence, theoretically, a P2P portfolio could achieve a compounded return of 18% per annum.  On top of that, frequent reinvestments mean that any default to a note/loan would only cause a minimal dent to my overall P2P lending portfolio. [See: Peer-to-peer (P2P) Lending: Maximising gain and reducing risks]

It should be noted that I’ve not experienced a single incident of default, touch wood. This, to me, indicates that the due diligence process undertaken by Funding Societies Malaysia is thorough and effective.

Conclusion

This year, I’ve set my sights on increasing the size of my P2P lending portfolio, and to diversify away from other asset classes.

If you are new to investing, or would like to add some diversity to your investment portfolio, you’d be delighted to know that there is a special promotion where Funding Societies Malaysia will top up an additional RM50.00, for free, into your account, once you have deposited and invested a minimum of RM1,000.00.

To participate in this promotion, please register an account via this LINK (be careful not refresh the link before completing the registration as it will affect the promotion code), or alternatively, use the promotion code: j1mzpcw5 when registering through Funding Societies Malaysia.

 HELPFUL LINKS

Click the link if you would like to know more about P2P financing with Funding Societies Malaysia.

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**This article is written in association with Funding Societies Malaysia.**

How interest rate affects stock market?

Dear Readers

Ever wonder why does the stock market place an importance on any interest rate adjustment? Today’s write-up will deal with the effects of interest rate on the stock market.

Charts and graphs on a computer screen

What is interest rate

When a lender lends money to a borrower, the lender expects some form of payment, from the borrower. That form of payment is interest. The rate of interest is therefore the cost of borrowing money.

When interest rate is high, the cost of borrowing would increase, and vice versa.

Importance of interest rate

Interest rate affects every facet of our lives, to the extent that, monetary policymakers and central banks often adjusts interest rate to steer the growth of an economy.

When economic growth is lacklustre, interest rate could be lowered to spur growth. A low interest rate climate encourages consumers, investors and businesses to borrow. The spur of cheap credit would encourage consumers, investors and businesses, big and small, to increase spending on purchases. These purchases may encompass various assets including, real property, commodities and stocks. This inevitably means consumers, investors and businesses will take up more debt, sometimes more than they can afford (unfortunately). For example, consumers would be more inclined to purchase big ticket items, like houses and cars, when interest on the loans are low. This scenario is a normality in Japan where housing loans can be lower than 1% per annum.

On the other hand, higher interest rate would increase the cost of borrowing for consumers, investors and businesses, and would tend to deter people from borrowing and thus spending, because they would not be able to afford a higher cost of borrowing. As a result, economic growth moderates. More often than not, interest rate is increased to prevent an economy from overheating, or to decrease inflation.

Indirect effect

So how does interest rate indirectly affect the stock market? To answer that, you must draw a relationship between interest rate and spending.

When interest rate increases, consumers and investors would have less money to spend than before. As a result, consumers and investors, already saddled with debt, would have to set aside more money towards the repayment of their loans. That leaves borrowers with less disposable income to spend on their needs and wants. Therefore, consumers and investors would buy less goods and services and the companies, which provide goods and services, make less money. When profits shrinks, the price of a listed company’s stocks would inevitably dip, and that causes a drag on the stock market.

In comparison, the stock market tends to perform better in low interest rate environment.

Direct effect

Companies which are already borrowing money from financial institutions would also have to bear the brunt from an increased cost of borrowing as a result of an interest rate hike. Companies would have to pay more to service their debts, leaving less money, as profits.

When interest rate is hiked, investors, who invest in the stock market on credit (margin), would soon find themselves having to close their positions, as any potential profits are offset by higher cost of borrowing. Hence, the stock market is subjected to selling pressures which would usher a slump in the market.

Conclusion

Any adjustment in interest rates, especially by the Feds, may have an impact on your equity portfolio. Being able to discern how the market would react to interest rate adjustments may give you an advantage, to either enter or exit the market. However, if you are investing in the long run, pay very little heed to any adjustments of interest rate.

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