Many have discovered that they were woefully unprepared for the financial crisis by being too heavily invested in certain investments. Now, investors are diversifying their funds by investing in new asset classes such as by making peer-to-peer loans through Prosper and Lending Club.
Traditionally, investors hoping to build wealth for the long term use a mix of stocks, bonds and real estate to make sure that their investments are properly diversified. Some even use exclusively stocks, others use exclusively real estate. Some simply ignore the bond market all together. Investors that are woefully not diversified are now looking at alternative investments which might have previously gone ignored, such as precious metals, municipal bonds, and now peer-to-peer loans.
To have a properly diversified portfolio, you want to make sure to have a good mix of assets in different vehicles that are spread across the globe. Certainly one should own their own home at a minimum and have some money invested in stocks and bonds, but what about person-to-person loans? Some investors have been earning a 12% rate of return even as the United States faced the worst financial crisis since the great depression by providing other people loans through a company called Lending Club.
Peer-to-peer loans are essentially a new asset class. They might be considered similar to bonds, but since these loans aren’t being provided to businesses or municipalities, they really any form of commercial paper. They aren’t shares in a company, so they aren’t stocks. They certainly aren’t real estate or any other existing investment. It’s almost an entirely new class of investment that might be best referred to as “residential paper.”
The amount of money you should put into lending club as a percentage of your portfolio is going to vary dramatically based on what your risk tolerance, your age, and the amount that you have to invest, but many investors are now putting 10% or 20% of their portfolio in peer-to-peer loans through Lending Club and Prosper.
