Investing Money: Classic Investments vs. P2P Loans
With the increasing digitization of the financial sector, there are also more and more options for investing your money. 30 years ago, the choice was modest, with private investors being able to choose between using their savings book and trading shares over the telephone. Today, thanks to the Internet, there are countless different ways in which you can make your money work for you.
On this page, we compare the classic investments with the new options that have been available for a few years. We hope this article gives you a good insight and that you find out more about new asset classes, especially P2P lending.Start Investing
Prepare to Invest
Today, there are many ways for investing money. When making an investment, every investor should ask themselves what they would like to achieve with it, because different investment classes cover different needs. You should think whether you want to build up wealth, fulfill an expensive dream, or make provisions for retirement. This also includes developing a suitable investment strategy. If you don’t prepare adequately, you may find yourself confronted with unexpected results.
In order to explain the different forms of investments, it is appropriate to point out a fundamental relationship between the three main criterias in investing. This can be described through the investment triangle: returns, risk and liquidity. All three points influence each other and only two points can be reached at the same time. As an example, let's take a high return with high liquidity. That sounds good at first, but it increases the risk. On the other hand, if you are looking for a high return with an acceptable risk, the liquidity suffers.
Therefore, to invest intelligently, you have to pay attention to your needs. Ask yourself the following questions: how high should the minimum acceptable return be? What do I need to feel comfortable when investing? How long can I do without my money until I can dispose of it again?
Average Annual Return
money to work
Annual investment returns delivered since May 2019. Higher than traditional asset classes. You continue to earn interests while the invested loan is overdue.
What Can You Invest Money in?
As soon as you have answered these questions, you can find out more about different forms of investments. They can be roughly divided into five classes: classic investments, real estate, securities, tangible assets and alternative investments.
Here you will find the traditional representatives of financial investments. For example, the savings account that many still consider being a very safe investment today, has little risk, but a low return. There are also three types of deposits: overnight, fixed-term and foreign currency. These are characterized by the fact that they are quite liquid and generate a higher return than the savings account. Other forms are home loans, savings contracts and life insurances, which combine the investment with other services.
Real estate is considered an immovable investment and therefore differentiated from classic investments. The owner earns a return by renting the property (apartments or business premises) that possibly increases in value over the course of the period of ownership. The return and the risk are attractive, but the liquidity is very limited. Depending on the location, the sale of a property can take several months to years.
This is where stocks, bonds, derivatives, funds and ETFs can be classified. These forms of investment promise high returns with good liquidity, but are often associated with a higher risk. The reality shows that there is a risk of total loss, particularly with individual stocks and individual bonds. In the case of funds and ETFs, this is greatly reduced because you invest in several companies that diversify the risk. In turn, they offer lower returns than well-performing individual investments.
The penultimate group are tangible assets, which can include, for example, works of art, whiskey or precious metals. These assets require a high level of market understanding and since these markets are formed by enthusiasts, liquidity is often a problem. Precious metals are easier to sell, but they cause high custody costs.
Alternative investments have only gained momentum in the last 10 years and new business models are being developed more and more. This group includes participation in fintechs, investments in cryptocurrencies or crowdfunding.
What Are the Best Ways to Invest Money?
In order to find out the best approach for your own profile of requirements, you should develop your own investment strategy. To do this, you should answer the following questions:
What is my investment goal?
As mentioned at the beginning, you have to know exactly what you intend to do with the fruits of your investment. If your goal is to grow money for retirement, you should invest very long-term. If your goal is to earn money for a dream trip, you should only invest with the horizon of a few months to a few years. The different time horizons result in completely different criterias. The financial dimension of the investment is also important. At a few thousand euros, the dream trip is much cheaper than securing your retirement, which in many cases can reach into millions.
What is my risk tolerance?
You have to ask yourself to what extent you can deal with volatilities and losses. Investing in a single company may be attractive, but there is a risk of total loss. If you invest in an ETF, you rule out a total loss, but also have a lower chance of return. You have to find a good mix of suitable asset classes and learn something about the possible gains and losses so that you don’t experience any surprises later.
Are new investment opportunities an option for me?
Cryptocurrencies and crowdfunding in particular are currently developing very strongly. In cryptocurrencies, Bitcoin and Ethereum are emerging as leaders of the movement, but there are hundreds of others whose fate is uncertain. This form of investment is only recommended for a long-term investment horizon and a high risk tolerance.
Crowdfunding is more diverse. There are many options for using your money within the investment triangle. Crowdfunding, or collective funding means that many investors contribute small amounts to a large project. There are three forms of crowdfunding: equity, debt, and real estate. With equity investments, the investors acquire part of the company in order to sell it at a profit after a holding period. Debt capital investments are characterized by the fact that the investors finance a loan for a company or an individual borrower for which they receive interest. In the case of real estate, one form of real estate investment is that many investors pool an amount so that they can buy a rental property, which pays a proportional monthly rental income.
A very interesting form of debt crowdfunding is investing in P2P loans. You can find this option on Lendermarket. Investors can invest in small shares of various loan types issued across different countries. Currently, Lendermarket offers the opportunity to invest in real estate-backed business loans, personal loans, and credit lines. A big advantage is that a single investor can already build a diversified portfolio with relatively little money.
Do I want to invest regularly?
Depending on your financial situation, it can make sense to invest money at regular intervals. This helps with building a habit. If you have a permanent job and a good salary, you can automatically invest a part of the savings every month. You can do it with ETF savings plans, which are now offered by many brokers. If you work as a freelancer or don’t have a regular income, you can decide for yourself every month whether and how much to invest.
At Lendermarket you have both options. You can invest regularly and irregularly. With our auto-invest function, you don't have to constantly look for new investment opportunities. Simply choose an amount – as a standing order or manually – and it will be automatically invested according to the criteria you have chosen.
It is often forgotten that there are fees associated with investing. The more you invest, the more fees you have to pay. It is important to mention that at Lendermarket we don’t charge any fees for your investments. This differentiates us from many providers in the classic area, especially brokers who charge a fee for every purchase and sale.
How much money do I want to invest?
Depending on how quickly you want to reach your goal, you have to adjust the investment amount. If you have just entered your professional life, a low percentage of your monthly savings is sufficient. If you want to go on a trip around the world in five years and can only save 200 euros each month, investing is already a priority.
How Much Should You Invest in P2P Lending?
Let's take the investment triangle and compare it to P2P lending. The return and liquidity are high with this type of investment, but you have to keep an eye on the risk. Some platforms such as Lendermarket reduce the risk by offering loans from different countries and loan originators with different terms and conditions. This allows you to build up a diverse crowdfunding portfolio in which the risk of losing part or all the invested funds is reduced.
We recommend that P2P lending complements a portfolio of different asset classes and is not the only form of investment. Depending on your investor profile (see questions above), P2P loans should form up to 20% of your portfolio. It is also becoming clear that P2P loans will become an important part of the portfolio. During the recent Covid-19 crisis this form of investment performed well with reputable providers such as Lendermarket and correlated only weakly with the stock market, which smooths the portfolio volatility.
We hope that this information has helped you and we look forward to welcoming you as an investor. If you have any questions, please visit our FAQ page. You can also contact our customer service via chat or email at [email protected].