"I don't look to jump over seven-foot bars; I look around for one-foot bars that I can step over," the ultra-successful investor Warren Buffett once mused. Buffett is onto something here: we often tend to overcomplicate investing, but what if there were simple, yet unconventional investment ideas that were both understandable and attainable to an investor looking to further diversify?
When you hear the word invest, or investment ideas, your mind might drift to stocks, real estate, or mutual funds. These are potential options that are popular in the investing world, but there's a host of other options available if you are looking to go less "conventional" routes.
As far as the stock market goes, some are fearing the impact of Russia's invasion of Ukraine and how that will affect food, energy, and financial investments. Moreover, a strong 2021 for the stock market hasn't fully translated to 2022, as January limped to a slow start.
Given that, what are some out-of-the-box investment ideas that can still produce a good harvest while remaining relatively safe in our chaotic world?
Investment Idea #1: Peer to Peer Lending
As the name suggests, peer to peer lending entails providing a short-term loan for another person. In a sense, we do this for people all the time. If you ever asked your parents for money and promised to pay them back (plus a little bit of extra chores as "interest"), then you in a sense received a Peer to Peer (P2P) loan.
But in a broader sense you don't necessarily have to know the person, as websites such as Peerform or Upstart can connect you with people across the globe looking for a relatively small loan (typically no more than $25,000-50,000) to finance a project, business venture, paying off a credit card, or tending to a personal matter.
For a lender, this may raise some red flags right off the bat:
How am I covered if the person doesn't pay me back?
Can I really make money off of this?
Don't most people just get loans through a bank?
Those are all valid questions and part of the reasons why P2P lending isn't necessarily the number one option for investors, despite having a low rate of default the last few years. Going through an intermediary like Peerform or Upstart adds a level of protection, however it should be noted that (as with most investment ideas) there are inherent risks to lending this way.
The loan isn't covered by FDIC (government) insurance, and you may not get the same rate of return if the borrower pays the loan off early. Additionally, if you aren't reinvesting the payments from the loan, you'll eventually be left without much capital once the loan term ends.
On the flip side…
The P2P market is still relatively new (it started in 2005), and it is projected to grow exponentially over the next five years. By 2027, the global P2P market is set to reach about $558 billion, with an astounding 29% rate of growth per year, says Market Watch.
In addition to being a dynamically growing arena of investing, P2P loans can also yield rates of return comparable to traditional investment ideas. Some investors have seen returns between 7-11%, which stacks up nicely to the average stock market return of 10% (in a good market).
Though the rates of return are similar, the biggest upside to P2P lending is that it puts you in the driver's seat and casts a wide net of people you can work with. Think of it like going through a buffet and choosing exactly what you want on your plate. When you set up a lender profile on one of the myriad P2P sites, you can specify exactly how much you're willing to give, what your risk tolerance is, and who you'd like to work with.
Some might be willing to take a flier on someone with a bad credit score and compensate by charging them a higher interest rate, but if you prefer to play it safer, you don't have to lend to people with questionable financial backgrounds. Sure, you may limit some of your options, but a common misconception about P2P lending is that it's an outlet for people whose financial decisions are too shady for a bank's taste.
The reality is that many people want to cut out the traditional middleman (i.e. banks, financial institutions), and instead go directly to the source. We see this in the emerging world of cryptocurrency, which isn't reliant on a central regulator and allows each party more flexibility. A transaction between two people is much simpler than a transaction facilitated by a bank or stock broker. Sure, the aforementioned sites like Peerform and Upstart serve as de facto intermediaries, but they're mere facilitators of a relatively straightforward transaction.
Another big selling point is that this is passive income in the truest sense. You have money to lend, you authorize someone to use it, and you make money off the agreed-upon interest. Unlike real estate, in which you may have to arrange for repairs and maintenance on your rental, you can provide this loan and reap the benefits of it throughout. There's not a lot of day-to-day maintenance involved.
And from a more societally-conscious standpoint, you can empower someone else's dreams, such as starting a small business or nonprofit, by giving them a financial opportunity that they cannot find elsewhere.
If you're intrigued by the idea of P2P lending, here are a few practicals on how it works:
First, find the platform that aligns most with your goals. Some have appealing protections like helping you diversify your loan to minimize risk, or offering advice on where you can invest your money.
As a lender, you'd next choose a potential borrower you'd like to work with, based on the listing that the borrower has provided. For instance, the borrower might be looking for someone to loan them $40,000 for 36 months. Lenders can then bid on which borrowers they want to go with before getting matched. If the agreed-upon interest rate is 10% for the personal loan, you'd make $12,000 as a lender over the three year period.
Bottom Line: Peer to Peer lending definitely has its risks and is still somewhat in the fledgling stage of its inception. The rates of return are solid, not astronomical, but if you have a general distrust of the stock market or conventional means, want to help someone out, and are seeking a relatively passive investment idea, this is a fantastic option. Given the associated risks, you may want to make this part of your portfolio, but be sure to diversify, or spread out, where you're investing your money.
Investment Idea #2: Giving
Similar to providing a loan, giving may seem counterintuitive to investing. When you think of generosity or philanthropy, you likely think of money given with no strings attached. There's no interest or quid-pro-quo on the side, as generosity entails giving out of one's own heart. Many feel a calling to provide for those in need, or empower people who are struggling.
In no way is giving simply about the "perks." However, it would be a huge oversight not to see giving as an investment idea – both monetarily and intrinsically.
Much like giving someone a Peer-to-Peer loan or even simply letting someone borrow money, giving enables people to have financial freedom and accomplish their goals and dreams. The world of the generous really does get larger and larger, as we remember that we ourselves have been recipients of immense generosity. Ask anyone how they got to where they are today and you'll be hard-pressed to find someone who wasn't helped along by someone who genuinely wanted to see them thrive.
And while generosity isn't always about getting something back in return, there are practical ways it can be a win-win situation for both sides. For instance, giving is one of the simplest ways to reduce your tax burden, especially when it comes to Capital Gains.
The dreaded capital gains tax is a big revenue source for the government and is levied if you earned money on stock, real estate, or other investments. If you have something that's greatly appreciated over time, such as a home or property, you might cringe at the idea of giving up potentially 15% of your gains.
However, there are a few ways to circumvent this. If you have extra assets that you don't need or want liquidated, you can donate them to a charitable organization or community in need.
Doing so not only provides an opportunity for the recipient, but also may give you an income deduction on the fair market value of the asset. According to Fidelity Charitable, "not only can you deduct the fair market value of what you give from your income taxes, you can also minimize capital gains tax of up to 20 percent. Assets subject to capital gains taxes can include investments like stocks or mutual funds, or hard assets like real estate."
Another way to potentially avoid paying capital gains tax on giving is by donating via cryptocurrency or stocks. In many situations these types of charitable donations aren't subject to capital gains tax, so like the above example, it really maximizes and strengthens your gift. Consult with your tax professional to determine how to proceed in your given situation.
Let's say you're passionate about giving to a local food bank charity. Your first inclination might be to sell your stock and use the returns as a means of giving. However, selling your stock may still be subject to Capital Gains tax, while donating said stock directly could save you from having to pay capital gains (the charity does not have to pay it either) and in turn funnels more money and resources to the charity of choice.
Overflow has made this type of giving possible by taking out the stress and reducing the process to a matter of button clicks. Just a few years ago, this kind of giving via stock or crypto was relatively unheard of, and the process was esoteric and cumbersome for the giver. However, the more people become aware of other giving outlets, the more they can expand their giving portfolios and reach charities and nonprofits in need.
For those concerned about time, Overflow does the legwork of bringing donors and nonprofit organizations together by facilitating the connection and communication both ways. And for those needing support, there's a dedicated support team throughout the entire process.
Bottom Line: Not only does giving empower others, it also offers a variety of tax breaks that can save you a considerable chunk of change come tax season. Beyond that, there are strategies to help the dollars you give are stretched to their full capacity and in turn benefit both the giver and recipient. Giving is a genuine investment idea, whether you see it as a tax-time saver or a tangible investment into your local community around you.
Investment Idea #3: Future-Oriented ETFs
Think of an ETF (short for exchange-traded fund) like a picnic basket of stocks. Instead of solely pouring your money into one company, which has potential to boom or bust, ETFs are passively managed by experts with the goal to achieve identical returns than its specified benchmark or index.
There are traditional ETFs that are pretty commonly invested in, such as ones that track with the S&P 500, but it's worth considering the direction that the world is headed and keeping an eye towards the future. Companies like GlobalX have curated ETFs that take into account what the world might look like 5 to 10 years from now.
Some of their most popular ETFs include a Robotics & Artificial Intelligence ETF, a Blockchain ETF, and a Lithium and Battery Tech ETF. Given the more unconventional nature of these stocks, Global X brands them as "Beyond Ordinary" ETFs.
However, the data shows that jumping on the train early could yield massive results. The $23 billion dollar robotics market is set to triple, reaching close to $74 billion by 2026. Beyond that, artificial intelligence is becoming more ubiquitous in your daily life – just ask Siri.
Something like blockchain technology, which is used in cryptocurrency, is projected to increase tenfold by 2026, according to Markets and Markets Research.
What is blockchain technology? According to advisor Pedro Palandrani, "in its most basic sense, a blockchain is a type of database focused on recording and maintaining data." Though many associate this technology with something like Bitcoin, Etherium, or other cryptocurrencies, blockchain can also be used for digital voting, official record keeping, or posting of property sales.
You may look at the numbers right now and be hesitant to commit to an ETF that doesn't have a proven performance record or isn't hyped up by the news. That's totally understandable. However, if the purpose is to think outside the box and keep an eye towards where the world is going, putting some of your investing portfolio towards future tech can be an effective long-term strategy.
That being said, some of the aforementioned ETFs are already performing well. The Global X Robotics & Artificial Intelligence ETF has nearly doubled in share price since the start of COVID in 2020, and is projected to continue the growth as supply chains rebound and technology improves year after year.
Bottom Line: Energy and real estate, two of the typically-sought after investment ideas, are facing uncertainty with war in Europe and a red-hot housing market that could either continue surging or pop as inflation rises and citizen buying power dwindles. Beyond that, the COVID-19 pandemic has pushed more people to be reliant on devices like laptops and smartphones as they work remotely. With the rise of tech giants like Meta, Tesla, and Amazon, there's no question that our world is growing increasingly more digital. Given that, investing some of your portfolio with an eye towards the future may be a sound, proactive move.