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Five key steps to navigate risk

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There’s no such thing as a risk-free investment. However, by investing wisely and examining all your options, you can help to minimise risk and generate a better return on your hard-earned money, even when the headlines are dominated by political and economic uncertainty.

Here, in the first instalment in its new investing toolkit, LendingCrowd looks at five key points to remember to help manage risk. The first – and easiest – is not to keep all your eggs in one basket.

1. Diversification

Savvy investors know that diversification is the easiest way to manage risk and improve opportunities for better returns. A typical portfolio might include a mixture of asset classes, such as cash savings, stocks and shares, government or commercial bonds and property. Increasingly, investors are turning to fintech lending platforms like LendingCrowd to further diversify their holdings by investing in loans to established British businesses.

We work hard to make investing with us as easy as possible while maintaining a diversified portfolio, and we have some exciting news in the pipeline that will automatically help new and existing investors to increase their diversification and reduce their exposure to individual loans. Stay tuned!

2. Liquidity

The ability to convert assets into cash is an important factor to consider. Investors aim to generate a return on their money, either for a specific goal or for a rainy day. But what happens when that proverbial rainy day arrives? Property, for example, can take months to sell, while some investments lock you in until the end of a fixed term. LendingCrowd’s platform features a secondary market, enabling investors to sell their loan holdings if they need to access their cash.

3. Correlation

This is the degree to which the value of different assets, such as shares and bonds, moves in relation to each other. Positive correlation means that as one asset rises in value, so will another. In contrast, negative correlation will see the asset values move in opposite directions. By lending to British small businesses with LendingCrowd, investors have access to an asset class that doesn’t correlate with the fluctuations of the global stock market yet provides the potential for inflation-beating returns.

4. Information

Knowledge is power. Or, as legendary investor Warren Buffett once said: “Never invest in a business you cannot understand.” If something looks too good to be true, it probably is. Many investors have been taken in by esoteric investments promising sky-high returns, only to be left with nothing when it all turns sour.

LendingCrowd is fully authorised by the Financial Conduct Authority and only lends to established British businesses that have been approved by the experts on its Credit Team, whose decisions are supported by leading-edge proprietary risk-modelling tools. Investing is all about trust, and trust is built on transparency. That’s why we update our loan book each day and make it freely available to everyone who signs up to our platform. As with all investments, please remember that your capital is at risk when lending to businesses.

5. Automation

Even the best fund managers can struggle to outperform the stock market. Meanwhile index-tracking funds, which automatically mimic the movements of indices like the FTSE 100, offer a cheaper way of investing in the market. For investors who want a quick and simple way of investing in a diversified portfolio of business loans, LendingCrowd offers two automated options, both of which can be held within its Innovative Finance ISA for tax-free returns. Please note that tax treatment depends on the individual circumstances of each investor and may be subject to change in future.

The Growth Account, which targets a 6% return, automatically invests in all the business loans available on the LendingCrowd Loan Market. Capital and interest repayments are reinvested in more loans, further increasing diversification over time. The Income Account targets a 5.6% return by working in a similar way, with the key difference being that interest repayments are transferred into a separate account as cash for investors to withdraw with no charges. Target rates are variable, net of ongoing repayment fees, estimated bad debt and before the 1% capital withdrawal fee.

If you invest through LendingCrowd you should understand that your capital is at risk. LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.

Article author

Gareth Mackie

Gareth Mackie

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If you invest through LendingCrowd you should understand that your capital is at risk.

LendingCrowd is the trading name of Edinburgh Alternative Finance Limited, Company Number SC468392, authorised and regulated by the Financial Conduct Authority (Firm reference number 670991). LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.

Read more about the risk involved when investing and borrowing.

The company's registered office is 23 Manor Place, Edinburgh, EH3 7DX.

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