While many of us would think of the stock market when investments are discussed, there are many other asset classes available to investors. With interest rates on bank and building society savings accounts remaining at an all time low and the possibility of further rate reduction looming, many investors are looking for alternatives to traditional savings accounts to get a better return on their money. One form of alternative investment that is becoming increasingly popular is peer to peer lending (known as P2P). This blog looks at the features of P2P vs other investments to give you an overview of some of the investment choices available.
While the attraction of higher returns can tempt investors towards more risky investment types, it is important to remember that all investments carry risk and you may not get back all of the capital invested.
Peer to peer lending (P2P)
This involves lending to businesses or individuals through an online platform, alongside other private investors. There are risks, as there is no guarantee that borrowers will repay the loan, however investment returns can be attractive – between 5-10%, on average. Investors need to look at the performance of individual P2P platforms and the historic default rate on loans. The performance will vary by platform depending on how they assess credit risk and the types of businesses that receive loans. P2P lending can be a good option for anyone wanting to start small, with some platforms offering investment opportunities from as little as £10. To reduce risk, P2P lenders recommend that investors lend to as many businesses as possible to reduce the risk of defaults impacting your overall return.
Shares are the most well-known type of investment and involve owning a fraction of a company and therefore a proportion of the company’s value. Investors can either own shares directly or invest collectively with other investors in a fund. Investors with shares become shareholders in the company and benefit from the profits the company makes. Some shares pay investors part of the company’s profits each year, known as a dividend. Investing in shares carries risks, as the value of the investment can fall if the share price falls. This can be affected by economic conditions or the poor financial performance of the company. Investing in one particular company requires time and research, and can be a higher risk strategy, whereas investing in a fund which buys shares in wider range of companies spreads the investment risk.
Bonds are considered to be one of the safest forms of investment as they pay a fixed rate of return. Investing in bonds involves lending a private company or the government a sum of money for a specified period of time, which they promise to repay along with a fixed interest payment. There are different levels of risk: the strength of the bond market fluctuates, and companies with poor repayment histories are riskier, but tend to offer higher returns than more stable government bonds. While it is generally best to keep bonds over a longer period of time to earn more, they have the advantage of being able to be sold quickly if needed.
Investing in property can generate a return in two ways: income yield (rent) or capital appreciation. When the property market is flourishing you could earn strong yields, but it could also go the other way if the market falls, so this is an option for more experienced investors. You could make money by selling a property in the longer term for a profit, renovating a property to sell it at a higher price, or renting it out, with the second and third options especially requiring a large amount of commitment. Other than buying property as an individual, options include investing in a property investment trust or in property loans through crowdfunding platforms.
Luxury goods (wine, artwork, precious metals)
Investment in luxury goods (also known as real asset investment) is a more unusual choice, but has the attraction of giving tangible assets to invest in. Examples include artwork, wine, and precious metals. The value of artwork does not increase over time and is based on what buyers are willing to pay, making it an unpredictable and higher risk investment choice. Investing in wine can give high returns if the wine increases in value with age, but experts recommend that investors buy in large quantities to get good returns. Precious metals are another less common investment – gold used to be considered a very safe choice, but its value has fallen recently. It is difficult to predict the value of precious metals as they are not linked to stock market movements.
All of these examples require a good level of knowledge and experience, and carry higher risk than investments such as bonds.
Which investment should you choose?
There are various different types of investment out there, each offering their own risk profile. How you invest should depend on your risk appetite, your investment knowledge, and how much direct engagement you are looking for with your investments.. It is recommended that you diversify your investments across different asset classes to help spread risk, and remember that you may not be able to withdraw your funds immediately.
We recommend that you seek independent financial advice before making any kind of investment.
Your capital is at risk with all investments.