It used to be the case that one would have some money, and they would go to an advisor who would then, in turn, research different markets and make a recommendation. That person would charge their client a fee for managing the money and a success fee should the placement of funds generate a profit. While the former would vary from, generally, 0.5% to 2% (with the rule being that you pay less when you place more money), the latter could go to up to 20% of your profits. And while, in the old days, one would pay for the work the advisor does behind the scenes to research and get top-notch information in a market, the alternatives nowadays no longer justify paying such high prices to place one’s money. The advisor is slowly being replaced by a user’s own research, online investment management companies, or even Artificial Intelligence.
The price for investing your money has also gone dramatically down, with the rise of more and more digital companies using advanced software to analyse data and generate attractive portfolios.
Stock market investments are also an attractive alternative. However, without experience in the field or a fee-hungry advisor, this can prove to be a problematic choice. The issue is two-fold: on the one side, picking the stocks to “bet” on can be extremely difficult, as it takes serious market research to identify the potential long-term champions; and then, of course, there is the approach that some companies might skyrocket when they are launching new products or tapping into a new market. However, this comes with significant risk, as overnight success is rare, and massive failures have been generating headlines since before we can remember.
One could think that actively investing one's own money is a bold move, but the old-fashioned “keep your money in the bank” option is now a money-losing option.
It’s been 12 years since the modern financial sector started to show its weaknesses, and 11 since the sequence of events that started with Lehman Brothers collapsing nearly destroyed the world economy. The new reality is one of lack of trust in the banks from the younger generation, and of negative interest rates. Yes, in many countries it actually costs you money to have banks take your placements.
As such, it is no wonder that it actually makes sense to find alternative ways to protect and expand one’s wealth. However, there is one significant risk that one should always consider: while not being tied to big institutions such as banks is what has made these alternatives attractive to younger generations in the first place, the downside to that is that, if anything were to happen to them, they will not have an entity behind them to bail them out, which poses an increased risk to customers. As such, research and caution are highly desirable.
Over the last 2-3 years, the shared economy model, championed by the likes of Uber, has been adopted in more and more industries, including the financial one.
More and more platforms are offering the option for people to create portfolios using small amounts of money, relying on the power of the crowd to create strength when put together.
So, here are a few of the options that are out there, and a bit on how they work:
- FinTech is always an exciting field. Have a look at players such as Robinhood and Sofi.com, which offer lending, mortgages and investment to categories of people who would not always qualify for support from a traditional bank.
- Peer-to-peer lending (P2P) uses marketplaces or platforms to match borrowers (people) lenders (also people) - see Mintos, Grupeer, Peerberry, Lendermarket. Those interested can “buy” a share of a loan on the platforms.
- Startups: new and exciting startups are in the news almost daily. Two of the ones that have piqued my interest are forgeglobal.com, seedrs.com. If you have a more serious amount of money to invest, getting “in on the action” at ground level can be incredibly rewarding, both in terms of supporting an entrepreneur who’s just starting out, as well as potentially getting a significant return for your investment. But, as with everything, make sure you do your due diligence and ample research in the space you are about to invest in.
- If you want to go industry-specific, there are now marketplaces for investments in real estate. Don’t have enough money to buy and flip a piece of real estate? That’s okay. You can pair up with other investors, crowdfund and get involved that way. Crowd Estate, for example, promises 17% annual returns.
Please note that I am an investor in some of the companies I have mentioned in this article. This article is not meant to provide investment advice, it is merely an investor’s perspective on alternative investments available. Capital at risk.