UPDATE: I've posted lots of updates since I originally wrote this blog 2 years ago. If you want to go deeper down the rabbit hole, check out this post comparing Betterment vs. Wealthfront ETFs and this one on Peer to Peer lending.
"Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones." - Benjamin Franklin
My wife Sue and I have been mulling over how to most effectively deploy cash in the current economic climate to generate decent returns without taking outsize risks. We've honed in on six main strategies, which I outline below in descending order of risk.
Since everyone has a varying amount of cash to invest, I'm going to specifically call out ways to deploy small amounts of cash in some of these strategies, as I want this post to be really actionable for anyone. The most important part is to just get started, and the biggest barrier to doing that is you thinking "I don't have any money to invest." So get yourself out of that mindset and jump into the world of being an investor, even if it's just with $25 (yes it's possible, below), $100, or $1,000 or $10,000, or whatever. I also recommend putting money aside every month to invest; that's a great way to get started.
Riskiest: Angel Investing
We've made a couple of angel investments, mainly in tech startups, including one in AngelList itself. And as I previously mentioned, I'm mulling over the idea of creating an AngelList syndicate. Syndicates allow backers to make investments as small as $2,500. The key here is to back a syndicate of someone you really trust, as they'll be the ones with their ear to the ground, picking the startups to invest your dollars in. But even then, it's incredibly risky. I wouldn't recommend investing in startups unless you're ready to plan on never seeing that money again. It's a feast or famine return structure, and your cash is typically locked up for years at a time and isn't at all liquid. If you think you want to try angel investing via a syndicate, then I invite you to back mine by reading this blog post and then registering on AngelList as a "backer." If I get enough interest, I'll spool it up. If you want to try investing on your own, play with this new AngelList fundraising filter that allows you to sort by amount raising, valuation, and even "signal" (screenshot above).
Just a Wee Bit Less Risky: Investing in Real Estate
Sue and I are very comfortable investing in real estate because we founded and ran a real estate brokerage years ago. Even so, we still tread carefully in this market. Real estate is typically a leveraged investment (since you're usually putting a down payment down with your own cash, but taking a loan out for the rest), which magnifies both the upside and downside. One option that we've just started looking into is diversifying under a Tenants In Common (TIC) model via sites like RealtyMogul. They call it "real estate crowdfunding," and it's an interesting approach. But generally, I'd recommend you avoid real estate investing unless you're ready to deal with 'toilets, tenants & trash' on a regular basis.
Risky: Betting on specific companies on the stock market
The level of risk here will depend on which stocks you choose. We made a big bet on TSLA and it's turned out well (so far). If you bet on a company like GE, it'll likely be much less risky, but conversely, you may not see much of a return (I held GE stock that was basically unchanged in value for a decade. Bummer.) The good news is that you can get started with ridiculously little cash. Buying a couple shares of a stock might run you $100, depending on the stock. And think about it this way: Owning just one share of a stock is infinitely different than owning zero shares, because just one share a) will still provide you a return on that cash if the stock does well and b) gets you into the mentality of being an investor.
Less Risky (but aggressive): Stock Market ETFs
There's a newish class of securities called ETFs (Exchange Traded Funds) that my wife recently schooled me on (thanks, wife!) and I've really been jazzed about. At a high level, an ETF is like an unmanaged mutual fund. It's just a basket of stocks that tracks a particular segment of the market. There are technology ETFs, biotech ETFs, manufacturing ETFs, etc. You buy an ETF just like a stock, by purchasing a share in it, which you can do via your online brokerage. But the beauty is that the risk is being diversified across many companies in the ETF's portfolio. And since it's unmanaged, the fees are typically much lower than for mutual funds (0.5% vs. 1.5% or more), and its goal is simply to track how well the stocks in that category do. The trick with ETFs is really in picking the right vertical. Do you think the biotech sector is going to outperform the market in general over the next 10 years? Then buy PJP, the PowerShares Dynamic Pharmaceuticals ETF (on NYSE), or IBB, the iShares NASDAQ Biotechnology Index ETF or any of the other biotech ETFs. Think tech is going to keep killing it? Then buy FDN, the First Trust DJ Internet Index Fund (on NYSE) or PNQI, the PowerShares Nasdaq Internet Portfolio. Each ETF takes a varying approach to a similar goal of tracking the vertical with a unique mix of companies in the portfolio. I love the idea of just picking a vertical I believe in, and then letting the ETFs find the next hot company in that space for me. Just like stocks, you can get into this for under $100, so give it a shot.
Even Less Risky (but by no means 'playing it safe'): Lendingclub
I was at a VatorSplash startup event where I heard the CEO of LendingClub, a peer-to-peer investing platform, talking about his company's growth. It was impressive. They've funded over $3.5 billion in loans (including over $250 million in the past month) and they've paid over $345 million out to investors in interest. Although there's a lot of talk about the sharing economy generally (think AirBnb, Getaround, Lyft, etc.), LendingClub might just be the giant of them all: Sharing your hard earned dollars with those who need them, and are willing to compensate you for loaning them out.
The idea behind LendingClub is this: Banks return a paltry, sub 1% return in checking & savings accounts. But credit cards often have a 15%+ interest rate. There's a huge spread there. If a lending platform could use technology to efficiently help investors get a higher return on their money than a bank's offering, while letting borrowers get a lower interest rate (on, say, their credit card debt), then everybody wins. That's exactly what they've done, and it's awesome.
But it gets even better. LendingClub lets you customize the level of return you want to get based on the amount of risk you're willing to take. Every borrower is scored between A1 (best) to G5 (worst). You can pick which types of loans you want to fund. The riskier borrowers will pay higher interest, but there will be more charge-offs. My wife and I created a fairly aggressive portfolio that is projecting a 10.15% annual return. Here's a screenshot:
You can see that the effective interest rate predicted is 18.51% based on our chosen mix of A through G notes we're funding, but 7.65% of that return is expected to be charged off, netting out to 10.15%.
The beauty of LendingClub is that your investment is divided into $25 chunks and is then diversified over hundreds or thousands of loans, which really mitigates your exposure. Think of it as your own personalized CDO :) LendingClub also has a service called "PRIME" which will invest the money for you based on the risk & return profile you specify (that's what the screenshot above is showing). The minimum investment amount for that service is $5k, and I recommend using it so you don't have to try picking the loans you want to fund manually. But if you don't want to put $5k into it, then you can get started with as little as $25, and it's the same story as stocks -- putting just a little money here is infinitely better than zero, if only to get you in the mindset of being an investor. Or conversely, if you have, say, $1MM to deploy and you're willing to put it to work at the risk level we chose above to achieve a projected 10.15% return, you could potentially earn $101k a year in interest income; enough to basically not have to work (don't forget about taxes, though; interest income is typically taxed at ordinary income rates, so cut 35%-ish off the top). You can learn more about peer-to-peer lending here.
Pretty Safe: GE Interest+
GE Interest+ is a great place to park cash if you don't want to invest it in any of the places above. Although it's not FDIC insured, it is backed by the General Electric corporation. It tends to perform as well as a 24 month CD (it's returning 1.05% right now if you have at least $50k there. Even at smaller amounts you're still getting about a 1% return. When interest rates go up, the returns can rise to 3% to 4% or more), but with a very important difference: It's liquid. You can write checks against it, like a checking account, so long as the check is for at least $250. You can get started with just $500, so if you have cash sitting in a checking account, or a savings account, or just under your mattress, I'd recommend moving it over here so at least you're earning the best possible return on it you can while still protecting it.
Really Safe: FDIC Insured account / Bank CD / US Treasuries, etc.
I'm not going to spend any time going over these options, as they're plentiful and you probably already know about them.
And it goes without saying, but I'll say it anyway: I'm not a financial advisor, and by following any of these tips you could end up penniless, living under a bridge for the rest of your life, so proceed at your own risk!
Do you have any other great suggestions? I'd love to get your pro-tips on ways to deploy cash effectively, especially in this market.
Could you discuss about the risk and the loss in P2P lending. Greater if you have example. My thinking is, in any loan, there's always someone who will default and you'll loose that money. How does P2P try to go after the default and can you recover some of that loss?
My buddy Dumas just sent me this article about LendingClub partnering with Google. That's huge news, partly because it raises the lending ceiling from $50k to $600k for qualifying businesses. I wouldn't be surprised to see LendingClub grow from a company that allows people to refinance credit card debt into a company that provides much larger loans -- like, for example, home mortgages. Imagine how amazing it would be to know that you're buying your house financed by thousands of other regular people in a sharing economy type model, with zero bank involvement. I, personally, would love that. And I love being an investor in LendingClub. Not only do we park our cash with LC so it can be used to help others refinance their cc debt, but we've also bought stock in LC in its recent IPO because we believe in it so strongly.
Our return after nearly a year at it with LC as an investor still stands at an incredible 13.93% -- and that's after being adjusted downwards for past-due notes! Just amazing to have a place to park long-term cash that provides a return like that when a checking account provides 0.10% or less, and a 5 year CD (which is more of an apples to apples comparison, since LC cash is put to work in notes via 3 or 5 year traunches) is returning 1.78%. LC is returning 8x what a 5 year CD is returning. Is it 8x riskier than a 5 year CD? Yes, possibly -- you're counting on borrowers (regular people who are refinancing debt) to repay their note obligations vs. having the money sit in a bank, and LC notes are not FDIC insured. But what is a bank doing with your cash? The same thing as LC is -- they are lending it out to borrowers. So the underlying mechanics are the same, it's just a higher risk, higher reward approach that injects technology & the sharing economy into the process; two things I'm passionate about.
If you're dubious about LendingClub, I encourage you to put just $25 into it as an investor just to experience it. And if you put $5k in, LendingClub will auto-invest it for you across 200 notes at $25 each, so you don't even have to choose which borrower you want to fund.
Send me a note directly with your email addy if you'd like a direct invitation to join -- LendingClub has a promotion going where they'll bonus both of us with some extra cash in each of our accounts if you join via my invite.
I strongly suggest NOT using auto-invest and here's why: You are competing against knowledgeable investors who will grab the highest quality loans, making them fill up quickly. When you have funds available and Lending Club goes to invest, it is likely that most of the loan available will be less than average in terms of quality. To be successful with Lending Club, you must determine several borrower data points which will indicate who is least likely to default. Income, debt-to-income and delinquencies are all good indicators. There are several others, some that are surprising and some that are the opposite of what you would expect. I have done the analysis on all past Lending Club loans and the results are available at www.peerloanadvisor.com
Huge congrats to Ben Narasin, an angel investor in Silicon Valley, who was an early angel investor in my startup AppMakr -- and also in LendingClub.
LC is going public! Here's a picture of Ben and CEO Renaud Laplanche in NYC.
Ben's photo above is an example of risky angel investing paying off. Although this rarely happens, when it does, it's huge. For example, here's a great post by EquityZen on LendingClub's path to an IPO. Word is that the angels got 2x the return of the Series A investors -- that would be a 112x return. Or to put it another way, investing $100k would return $11.2MM. Not bad when it pays off!
Update! 9 months in, the LendingClub return is still at an adjusted 15.63% -- higher than I expected. I'm just hoping to get 10% annually from this investment (which would be incredible, considering that 60 month CDs are currently paying out 2%).
LendingClub automatically adjusts for past-due notes. We haven't had any notes get charged off yet, although I imagine some will trickle down into chargeoff status soon, as there are some in the 31-120 day category.
We are so impressed with the returns that we just increased our investment allocation to LendingClub. I consider it a best-practice to think of LendingClub as Hotel California: Money goes in but not out. The funds are tied up into thousands of micro-loans of $25 each, so getting the funds out before those 36 to 60 month loans mature is difficult (there is a secondary market, but I haven't tried using it and don't plan to). So just put funds in there that you don't need, and then either re-invest the interest, or use that as your source of cash flow.
LendingClub is great for small amounts of money -- you can literally become an investor with just $25. But it's also intriguing for larger chunks of cash. I'd love to know if anyone has tried putting $1MM into LendingClub. It wouldn't be FDIC insured, which makes it risky, but if you did that, you'd make $100k/year in passive income (assuming a 10% rate), which is still $70k-ish/year after you pay ordinary income taxes on the interest income. Not a bad retirement income.... if you can stomach the risk!
One thing to consider: I've noticed that when we deposit funds into LendingClub, it gets invested at a rate of $3.5k per day, at least with the portfolio we've defined. That means it would take 285 days to invest $1MM. So if you're going to try a crazy plan like that, don't put it all in there at once!
Here's a GREAT article on angel investing (thanks for passing it over, Isaac!) from the CEO of Wealthfront.
Here are some great tips from that article:
(Related: I'm comparing Wealthfront to Betterment in this blog post)
Keep in mind what the Nobel Prize-winning psychologist Daniel Kahneman has discovered:
One of the most amusing episodes in the book comes when Kahneman visits a Wall Street investment firm. After analysing their reports, he calculated that the traders, who were highly prized for their ability to “read” the markets, performed no better than they would have done if they made their decisions at random. The bonuses that they received were, therefore, rewards for luck, even though they found ways of interpreting it as skill. “They were really quite angry when I told them that,” he laughs. “But the evidence is unequivocal — there is a great deal more luck than skill involved in the achievements of people getting very rich.”
Don’t put all your faith in fund managers and accountants. Kahneman’s analysis of their long-term performance reveals it is not skill but luck that is responsible for their successes.
Dividend Producing Assets -- what's better, a muni bond, or LendingClub?
I was curious to see if LendingClub could beat out municipal bonds (which have tax advantages), so I did some digging on the matter. Below is what I found. I'd love to know if anyone has feedback on this analysis -- it may not be completely accurate.
Spoiler Alert: I actually found LendingClub to provide a higher net return, even after factoring in the tax benefits of muni bonds.
First to frame muni bonds: Here's a Forbes article that argues that CDs are a better investment than muni bonds, even factoring in the tax advantages.
Also, the yield on many muni bonds is currently very low. For example, this chart shows that 1 year ca muni bond yields are 0.4%. Thirty year ca muni bond yields are 3.7% -- but that's a lot of time to be locked into a bond, especially considering today's low interest rates. So let's just take a 10 year bond for comparison purposes, whose yield is 2.2%.
There are bond ETFs that return more. I found, for example, a California muni bond ETF, which I calculated has returned 5.5% annually over the past 6 years.
Then, to do an apples-to-apples comparison of these tax-advantaged bonds vs. LendingClub (whose income is taxed at an ordinary income rate) I used this tax equivalent yield calculator to see what a non-tax sheltered investment would have to return to beat out either a 2.2% yield or a 5.5% return:
PLUS I'm not sure the calculator is right. As that Forbes article mentions,
"most tools for estimating the tax benefits of owning municipal bonds provide inaccurate results that overestimate the benefits. They ignore the fact that there is a difference between your marginal tax rate and your effective tax rate."
Our LendingClub investment is projected to return 10.15% annually, net of defaults, which handily beats the 10 yr California muni bond and also edges out the ETF. Really, I suppose, the question comes down to one of risk: A California muni bond is backed by the state of California. LendingClub is diversified over thousands of borrowers and default projections are built into the net interest rate. Which is more secure? It gets a bit philosophical: Would I rather bet on the "state," or on thousands of individuals? I'm actually not sure which I consider less risky!!! But at least for our risk profile, LendingClub comes out ahead.
And then there's also this: Just knowing that our hard-earned dollars are going to help other people consolidate higher interest bills via LendingClub does have a meaningful level of significance, at least to me. I'd prefer to be doing that than funding what I would generally consider the less efficient & more wasteful use of my funds by the government via a muni bond.
Anyone have thoughts?
Oh snap! The automated investing landscape is heating up! There's a big competition right now pitting Betterment vs. Wealthfront. Check out this Quora post where both CEOs posted as to why theirs was better. I might have to put some money into each one to see how they perform against each other!
The plot thickens -- it looks like the S&P 500 has outperformed various Betterment allocations in the "all time" view:
And what's stranger still is that on " Our Portfolio - Betterment " there's a chart that shows Betterment vastly outperforming the S&P500... but the actual data shows the reverse. Strange; I'd love to get an answer on this discrepancy from the Betterment CEO.
(In fairness to Betterment, Wealthfront doesn't even publish such data, sofar as I can tell, so although I'm asking a question here that might be putting the Betterment CEO on the spot, at least they're publishing the data, which I appreciate.)
The first chart shows the S&P 500 vs. various blended Betterment portfolios. During the time frame you chose, the S&P 500 beats out all of the other portfolios. Start your time period six months later and the bond index appears to be a clear winner - any of the portfolios that allocate to bonds will dampen the volatility and as you go through a big downmarket will outperform.
The second chart is comparing the 70/30 Betterment multi-asset class portfolio to an index made up of 70% the S&P 500 and 30% TIPs (not a pure 100% S&P 500 index).
These type of charts that focus on the cumulative return can be too heavily swayed by the time period that is being displayed. The real question is around the volatility of your investment. How many of us stayed in the market when the slide displayed in your top chart around 2009 was occurring? You would have to be fully invested to get the gain by the end. Investing in a diversified allocation can dampen that volatility and keep you in the market.
Jamie, first off, thank you for responding. It says a lot about a company that the CEO would respond, especially over the 4th of July weekend like you did. Very impressive, and awesome.
Yes, I totally get that this is about the long term, and long term is what I'm interested in. I'm not so much questioning the term as I am the disparate data points I'm getting from your site. Or to put it another way, if I'm going to put my money somewhere for the long term, is it better to put it into Betterment or just the S&P 500?
I ran a better apples-to apples comparison. Could you help me understand the disparity here?
On https://www.betterment.com/portfolio/ I looked at "Betterment 100% stock from August 2007 to March 2014" as compared to what an "average advised investor" could've made, and your chart shows that Betterment returns a full 7.8% points higher:
Then, in my Betterment Dashboard, I looked at a 100% stock Betterment portfolio vs. the S&P500 for the same dates:
So here's what's confusing me:
If I had to guess, I'd say that none of this was intentional. I'm sure you didn't set out to obfuscate anything. But the reality is that from what I can tell, Betterment (and I assume Wealthfront too) are under-performing the S&P 500 right now, from what I can tell from the data. And providing more clarity in to that for someone like me who's just starting to explore automated ETF funds would be super helpful.
Daniel, sorry for the confusion. I'm not affiliated with Betterment. I am an industry veteran and was happening upon your post and wrote back to get a feel for how you were interpreting these charts.
My 2 cents on your questions:
1) Difference of 1.2%? Software bug.
2) Probably right with the date ranges
3) Not sure on how they are calculating the "average informed investor" - my experience leads to and investor not being 100% invested in the S&P 500. Given periods of time even the most aggressive investor hedges their bet or goes to cash. I don't believe and haven't really seen an average investor invest in solely the S&P 500 and stay in exclusively over the years. I wouldn't consider Betterment as a replacement for putting money in the S&P 500 and would rather consider it as a thoughtful, diversified, ETF portfolio that should dampen some of the markets volatility.
Jamie, aah sorry! Jon the CEO replied to me on Quora, and the responses were similar so I'd just assumed that was him here, too. BTW here's what Jon wrote back on Quora:
At any rate, Jamie, thanks for the independent verification of what Jon's saying -- you both hit on the value of diversification.
I'll probably try investing in both Betterment & Wealthfront and see how things go.
OK I just got a reply from Jon (not Jamie!) the CEO -- he asked his team to clarify some of my questions. Again, amazing that, over a holiday weekend, he + team have been so proactive. Much appreciated. Here's what they said:
Q: In the first chart, the graph shows +22.1% but the text says 23.3%, a difference of 1.2%. I don't understand why those numbers aren't the same.
A: In the interactive backtest graph on the portfolio page, the number in the hovering bubble is based on where your mouse is. In this case, you were hovering over Feb 2014, so the returns in the bubble were from Aug 2007 to Feb 2014 while the summary text below is from Aug 2007 to Mar 2014. We built the hover functionality in to give users extra control if they wanted to look at data from a more specific time range. There may be a better way for us to make this more clear, and I'll be sure to pass your feedback on to the design team. If you drag the slider to set a new start date, you'll see that the two values match up.
Q: I'm also not 100% sure why the top chart shows a 23.3% return but the bottom chart shows a 25.3% return for the same allocation, but I'll just chalk that one up to me not being able to get the date ranges 100% spot-on.
A: You're absolutely right. The performance graph in the Betterment web app is based on daily return values while the graph on the portfolio page is based on monthly returns. Getting the start and end date to line up perfectly is, therefore, difficult.
Q: But my biggest question is around how you're calculating the "average informed investor's" performance in the top chart. You show a cumulative return of just 15.5% for that average investor, but the S&P500 returned 45.6% in the same time period. Are you saying that an average investor wouldn't just invest in the S&P500? Because I think an average investor absolutely would just do that. But even more to the point, the whole thing just feels fishy, i.e., on your public page why are you not tracking Betterment performance to a benchmark like the S&P500 and instead creating a more poorly-performing fictional average investor?
A: Many people ask to compare performance numbers to the S&P 500, and we’ve built that ability into this interactive tool, even though it's not an ideal comparison, because it's not nearly as well diversified as a Betterment portfolio.
If you click on “Additional data, options, and disclosures” and then select “View all portfolios at once” the graph and table will show all of the Betterment and ARC portfolios in addition to the S&P 500 and Five Year U.S. Treasury Bills.
You can then adjust the slider to compare performance over different time periods. In some periods the S&P 500 is the top performer. In the longest periods in this data set, the more diversified portfolios tend to outperform the S&P 500.
So I took their advice and tried looking at S&P on both; here's what I found:
Chart #1 shows 28.7% cumulative return for S&P500 Index:
While chart #2 shows 45.6% cumulative return for S&P 500 SPY (which tracks the index, from my understanding -- should be the same)
Same time period for both graphs. I don't get why there would be a disparity. I've asked Jon for an answer and I'll post whatever I get here.
My buddy Andrew Dumas just told me about Wealthfront. From their website: "We employ ETFs that track indexes for the 11 major asset classes used in our portfolios. Each ETF is chosen by our investment research team based on its relative cost, tracking error, market liquidity and securities lending policies. We always tell you why we chose each ETF over its alternatives."
It looks interesting. Basically access to low-cost ETF experts. Here's a description of the company from Crunchbase:
"Wealthfront is the largest and fastest growing automated investment service. It combines world-class financial expertise and leading edge technology to provide sophisticated investment management at prices affordable for everyone."
And here's a description from this TechCrunch article:
"The brainchild of former Benchmark Capital founder Andy Rachleff, Wealthfront launched in 2011 to give anyone access to the type of financial planning that would normally only be available in private wealth management shops of Goldman and others"
So, I'm going to check it out. One very cool, sophisticated thing it offers is "tax loss harvesting," which is explained on the account setup page, and from their website: "Daily tax-loss harvesting and that Tax-Optimized US Index Portfolio could add more than 1.6% to your portfolio's annual after tax return."
Here's an update, four months later:
Our LendingClub return is still high, at 19.69%. We did just get our first past-due borrower, who's late on a $25 note, for which LendingClub has adjusted $18 out of our account value. I'm so bullish on LendingClub I've increased our allocation by 50% and definitely plan on putting more in there. It's a great feeling to know you're helping regular people borrow money at lower rates to pay off credit cards or other super high interest debts. I knew that would be a cool part of it, but it's an even better feeling than I expected.
We expect the return to settle down into the 10% range (LendingClub projected10.15%, above), so there will certainly be more defaults to come.
And here's the specific note that's gone past due -- you can see a collection history log:
And in terms of stocks, TSLA continues to skyrocket, but FDN, IBB, and PNQI are below our purchase price, with only PJP trading above purchase price. Such goes the stock market, but we're in those positions for the long haul so I'm positive about them.
What's your current past due breakdown now? What is the adjusted percentage? Mine is 9.5% not including past due notes, 5.6% with.
Yeah -- we're running a much more aggressive portfolio than you are -- and even so, LC hasn't gotten funds into my target allocation as aggressively as I'd like. You can see the target vs. actual allocations above. (Part of the reason LC is off is because a few months ago I re-distributed the allocation out of A & B notes entirely and more into E & F notes, so it will take many months for LC to get to the new targets).
But even so, our adjusted return is holding steady at 13.01%. Without adjusting for past-due notes, we're at 17.82%. Pretty incredible, considering that it's been about a year since Sue and I first started investing in LC.
LC says the historical returns for a portfolio like ours should be between 7.5% and 11.72%. So I fully expect that ours will dip down from where it is today.
When I wrote my orginal post Show Me The Money: Six Strategies to Put Your Cash to Work, one of the strategies I included was leveraging General Electric's high-yield money market account for the cash you want to keep readily available (i.e., cash you might need to access in the next 3 to 12 months). But GE has shut that program down as an overall strategy shift away from its GE Capital business, and so I was left searching for an alternative. In this post I'll detail what corporate money market accounts are, how they work, how they differ from other types of savings or income generating accounts, and which the best alternative is. I'll also tell you what I ultimately ended up deciding to do, which was different than I expected.
Why you should care about this at all:
One of the mistakes I made in my 20s was not being curious enough about financial instruments, and how I could leverage them to reach my personal goals faster. I was so focused on building startups that I didn't pay enough attention to how to optimize my investments. I set out to change that in my 30s, and I've been blogging about it in the hopes that anyone else who isn't yet leveraging these tools can learn about and use them.
As with anything in life, from optimizing your health to optimizing your finances, you have to start with a goal. My family's financial goal is currently optimized for asset growth, with a secondary focus of passive income generation. Since we're still (relatively) young, we're willing to take aggressive stances on both. Here's how this breaks down for us:
+P2P Lending has a history of high returns and low volatility, particularly for larger investors.
+The time and skill requirement is low, making it great for passive investors.
-It is tax-inefficient, particularly for investors of high risk loans
A unique way of investing that has been around for less than a decade is Peer-to-Peer Lending. In P2P lending, loan-seekers seek loans directly from individuals rather than banks (who loan money using deposits from individuals). This is how the process works: