Are investments in loans a modern alternative to traditional asset classes?

Year 2022 should’ve brought the relief and reset sorely needed by the ailing economies around the globe. Instead, 2022 brought even more turmoil and uncertainty. Although the pandemic era seems to be over the hill for now, its lingering effect combined with political unrest around the world has put most of the world’s economy in a virtual chokehold.

The most tangible effect, felt by almost everyone, are the commonly high inflation rates. And high inflation tends to eat away at most conventional investments. It should come as no surprise then that traditional investment assets fail to perform up to the level of yesteryear.

Why are traditional asset classes ineffective to battle high inflation?

What is the one thing financial advisors, fund managers and talking heads never cease to stress? You should invest your money so as to protect it against inflation. While, generally speaking, that stands true – in times of high inflation rates, investment returns may struggle to offset the decrease in monetary value. In cases where inflation rates are higher than return on investment (ROI), you will be losing money, albeit at a slower pace than others.

Out of all traditional assets, equity shares possess the highest chance of beating inflation. Typically, with high inflation rates, you cannot rely on bonds or cash. But real estate is a long-term, illiquid investment – which isn’t bad in itself, but the ROI can be much lower when all is said and done.

The problem with equity shares is that not only do they have potentially the highest ROI – stocks are known to post returns of over 20% for multiple years in a row. They also, unfortunately, pose the threat of losing you the most value of your investment – in extreme cases you might come up with nothing left.

In less extreme cases, stocks are still to be considered a highly volatile asset that may or may not help you outlast times of high inflation. For example, even the most renowned stock index – S&P 500 – is down almost 17% for the year at this moment.

When you put all of this together, it’s clear that traditional investment assets are very likely to either be too volatile (read – unsafe) or offer too little in ROI. That’s not to say that these investments should be avoided, but if there’s something better available – wouldn’t you want to know?

What about an alternative?

There are quite a lot of alternative investment options. In fact, the amount of these options far outweigh the amount of traditional investment classes.

However, in this case we’re interested in just one – investing in loans or P2P (peer to peer) loans. And even more specifically, we’re interested in whether investing in P2P loans can be a replacement to more conventional investments.

Immediately, a case can be made about how investing in loans can give you a substantial tool in battling the inflation rate. This is mainly because even though with stocks there’s potential for returns well over 20%, P2P loan investments still offer you a very competitive return range per year. For example, at SWAPER you can expect a return of your investment of up to 16% once you acquire your loyalty bonus.

Similarly, around 10% returns is what the stock market has averaged long-term. However, long-term averages tend to skew the actual picture, as bull markets offset bear markets and vice-versa. 10-16% in P2P loan returns is also more than bonds offer, especially when you consider that bond interest rates are inversely proportional to bond price. This means that even though the bond return rate might seem worthwhile, a market fluctuation can diminish these returns via reduced bond price at maturity.

As for investment risk – yes, bonds are typically considered some of the safest investment assets out there. Especially if you invest in government bonds. Corporate bonds have higher interest rates, but higher interest rates mean higher risk, too. For example, if a bond issuer’s financial stability changes, this investment could mean negative returns or worse.

Investing in loans does have a downside, too, and it’s exactly what you imagined it would be – your investments are usually not secured by the corresponding financial authority and your return on investment depends heavily on the borrower’s capability to repay the loans. The upside – think of your P2P investment as investing in ‘personal bonds’, where the bond issuer is the borrower and the bond maturity is the loan term. In general terms, you wind up with larger returns over shorter terms than with actual bonds.

However, risks like these are common for other investments, too. For example, stocks are subject to market fluctuations, corrections and even crashes regularly. Whenever a substantial downturn happens, your capital is at risk. And, while it may be a little easier to understand what loans you’re investing in, gauging the market and even more so – predicting its movements cannot be done with absolute assurance.

Does P2P lending take the upper hand among the alternative investment class?

The answer to this question will always come down to the individual needs and risk tolerance of investors, as well as the overall financial situation in the world.

In layman’s terms, the higher your risk tolerance, the more content you are with investing in high-risk assets, like stocks. If your risk tolerance is low, you’d turn to bonds for investing purposes. P2P loan investing offers you a bit of both worlds – a higher return, like you would enjoy with stocks, and lower risk, as with bonds.

As far as the average returns go, P2P loan returns are higher than most other alternative investment options, too. Only Real Estate Investment Trusts (REITs) really come close in the long-term returns. However, as you might’ve already guessed, REITs have limited liquidity, similar to other real estate investment forms. While this is not an issue if all goes well, and you’ve settled in for the long wait – not everyone is looking to invest long-term.

What shouldn’t be overlooked is the availability of P2P loan investing. While other alternative and traditional investments may require a starting capital of €500, €1000 or even more €, you can start investing in P2P loans from as little as €10. Sign up now.

Should you consider investing in P2P loans?

Once again, it is entirely up to you to pick and choose your investment ventures.

Nevertheless, it is certain that P2P loans have become a popular alternative to conventional investment options. The first P2P loan platforms were launched in the UK and US almost two decades ago, and it seems they are here to stay. That goes to show that investors take interest in an investment option that can provide a significant return, moderate liquidity and reduced level of risk when compared to the stock market.

Ultimately, you should consider your risk tolerance, age and income potential, all in that order, when deciding upon where you invest your capital. There are multiple factors that go into deciding for one or the other option. If you do decide to invest in P2P loans – good for you! If you’d rather stick with the traditional investment options – also good for you! Either way, an age-old truth states that you should never put all your eggs in one basket. And in a diversified investment portfolio, there’s always room for both P2P loans and traditional investments.