Why Peer to Peer investments make sense in 2020
The economic crisis brought on by the CoVid-19 outbreak is set to have permanent effects on investor behaviour, with many people looking beyond traditional stocks and bonds for greater security and stability.
One of the big winners from this change will be the alternative investment sphere and Peer to Peer (P2P) investing in particular. With many people’s stock portfolios losing most of their value almost overnight and the volatility of markets set to continue for some time, the need for different asset classes will become more acute.
Many smaller investors have never been exposed to the incredible opportunities presented by the world of alternative investments. In fact, until the rise of the P2P industry, alternative investments were almost exclusively the preserve of the ultra-rich or large institutional investors.
Traditionally alternative investments were things like art, fine wine, property, hedge funds, private equity and venture capital.
According to Maxim Pashchenko the Founder of the P2P investment platform Nibble the part of IT Smart Finance holding: «Private individuals without large amounts of money are looking for investments that they can easily manage and control themselves and that offer both good returns and solid security.»
The idea that one needs lots of money to start an investment portfolio is also turned on its head by the P2P industry.
«The P2P lending industry is the perfect investment vehicle for this group as it offers a low barrier to entry with investments generally starting from just a few Euros,» says Maxim Pashchenko.
What are alternative investments?
At its most basic definition, an alternative investment is something that behaves entirely differently from the traditional classes of bonds, stocks or currency.
Investing in P2P loans falls firmly into the alternative investment category.
The good news for keen investors is that the democratization of investment brought on by technology has reached the alternative arena as well, and with this has come the possibility to invest across borders easily from the comfort of your own home.
Here are four key benefits of adding alternative investment in the form of P2P loans to your portfolio:
1) Easy diversification
One should always have investments across a range of different asset classes in order to hedge risk. This diversification is probably the most important part of building a strong, robust portfolio.
As we are seeing from the fallout of the current crisis, many people are at risk of having their entire life savings, retirement funds, and investment portfolios wiped out in one go.
If you have your entire portfolio in stocks, you may never recover from the crisis.
By ensuring that your portfolio contains a variety of asset classes with little correlation to each other you will massively improve your chances of remaining profitable when investment markets start to decline.
Contrary to what banks and mainstream investment firms would have you believe, traditional assets are the most volatile during a large-scale financial crisis, like the one we are currently experiencing.
2) No location limits
Due to their digital nature, P2P investments give you access to the best and most attractive investment opportunities anywhere in the world, regardless of your own location. While interest rates in the world’s big economies are generally low, P2P allows you to tap into emerging markets where returns are usually much higher.
The difference can even be seen within the P2P industry itself, with loans in a country like Germany returning between 5-7% and those in Eastern Europe edging beyond 10% in most cases.
This geographic diversity ties in to point one above, in that it helps increase the security of your portfolio and safeguards against regional financial crises. Not all countries will be equally affected by the CoVid-19 crisis and investing in P2P loans gives you easy access to healthy returns in profitable markets.
3) Individual Control
When you decide to invest a monthly sum of money into a mutual fund with a bank you are essentially signing over control of your financial destiny to a group of faceless strangers. As most people have neither the time nor the inclination to micro-manage their own stock portfolio this makes sense to them.
Because the P2P industry is heavily tech-driven and focussed on individual investors it gives you the option to be as involved in the day-to-day running of your portfolio as you want to be.
You choose which loans to invest in, which countries to choose, when to make your investments and there are generally no fees for investors on most P2P platforms. Buy-back guarantees and secondary markets where you can sell your investments also give more liquidity than traditional investments.
4) Better Returns
We’ve touched on this already but it is the most important reason to consider P2P investments. After all, investment is about making capital grow above all else.
Alternative investments are generally more profitable than their traditional counterparts and can also generate these better returns over a shorter period. They certainly outperform a savings account at the bank and only the very top investment funds can match their profitability, funds that are not accessible to average retail investors.
As Nibble´s Founder Maxim Pashchenko says: «If investors do thorough due diligence and make sure they invest in a trusted platform with good security and a solid track record, they will come out of the current crisis with great financial gains.»