According to venture capitalist Charles Moldow, marketplace lending platforms will generate $1 trillion in loans by 2025. All lending institutions currently generate more than $870 billion in annual revenues. That’s bigger than the automobile and the airline industry combined. Thus making it one of the best options for a struggling investment portfolio.
The advantages that marketplace lending has over traditional lending include lower costs, greater efficiency, and trust. Thanks to savings and loan scandals, the banking industry bailout, and the rise of digital technology, people are losing trust in traditional lending institutions. Modern tracking systems mean greater transparency all around, and borrowers and lenders no longer need the middle man to connect them. Technology is the connector.
Growth of Real Estate Crowdfunding and Why Investors Can Have Confidence
American Banker reports that 13 of the marketplace lending sector’s largest companies grew by 700% between 2010 and 2014. Real estate crowdfunding (RECF) is a huge part of that sector.
Like all markets, the stock market has its ups and downs. Rising tides may lift all ships, but the natural ebbs and flows of financial streams means that uncertain conditions could lead to just as many ships sinking as surviving. Volatility is unpredictable, but what is predictable are the inevitable losses that follow from irrational optimism.
It’s not that volatility is a time to ditch stocks, bonds, commodities, and other traditional investments. Rather, investors can protect those investments by implementing risk management strategies. There are two risk management approaches widely acknowledged to be effective in protecting investment portfolios— diversification and asset allocation.
By implementing these two risk management practices, investors can be more confident of future growth if they monitor their investments and move a percentage of their investments into the sectors that are growing and earning gains.
What to do if Your Investment Portfolio is Struggling
The key to investing is knowing your risk tolerance. Are you aggressive, or do you prefer more conservative investments? If you’re an older worker and your portfolio isn’t doing well, and you expect to be comfortable in retirement, you may have to increase the amount of investment you have in aggressive real estate funds. On the other hand, if you are approaching retirement and your portfolio is strong, you don’t want to take too many risks.
But what if you are younger and your portfolio is weak? Real estate crowdfunding has a lot of offer any type of investor in a struggling financial market. The key is to know how much of your portfolio to move into RECF, and which parts of your portfolio do you want to adjust.
Take the following steps to analyze your current portfolio:
- Identify how much of your investment is in each asset class. For instance, do you have 80% of your portfolio in stocks?
- Within each asset class, how much of your portfolio is allocated to specific investments?
- Which of your asset classes and allocations are performing the weakest month-to-month, in the last year, and in the last two years?
- Would there be any fees or penalties associated with moving any of those investments into another asset class or re-allocating them to improve your gains?
Do Your Due Diligence: Research Real Estate Crowdfunding Investments
After you’ve identified the weakness in your current portfolio, you want to identify the strengths in potential marketplace lending investments. Do you want to invest in student loans, real estate crowdfunding, or another corner of the marketplace lending sector. Your best bet is to choose a sector with which you are familiar.
Once you’ve identified stronger investments in marketplace lending— and they’re out there— determining the true cost of migrating your weaker investments into a real estate crowdfund or other lending class and weigh those costs against potential returns.
Marketplace lending is on the upswing. This is a good sector to invest in now for growth. You don’t want to pass up the opportunity because you’re committed to struggling investment classes. If your portfolio is losing ground, do the math and move your money into an asset class that is growing and earning gains for other investors. After you’ve picked an asset class that is performing well —like real estate crowdfunding— focus on distributing allocations within that asset class.