If you ask any experienced investor out there for advice on a smart way to go about your funds, 10/10 times you would get the same answer: “Never put all your eggs in the same basket. If you dropped it, you’d lose everything!”. The most important rule in investing is that you should diversify as much as you can. Stay with us for the “what”, “why” and “where”.
What does “diversification” mean?
Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories (Investopedia). If you want to achieve good returns while protecting your finances from abrupt losses, you should always search for new assets and instruments, for your next investment move. On top of that, it’s recommended to frequently monitor all instances where your funds are allocated, compare results and adjust your strategy by redistributing your investments.
Why should I spend time doing all that? It sounds like a lot of work! Can’t I just invest in various assets within the same group?
It’s a common misconception that investing only in stocks, but distributing your funds between various industries; or investing only in real estate, but targeting various locations and buildings, equals diversification. You’re technically diversifying, but not in the right way. Even though you’re splitting your funds, you’re restricting yourself to one asset group’s average return-of-investment and risk levels, which makes you vulnerable and means lost opportunities for profit.
Occurrences like economic crises and stock market crashes might sound unlikely because they don’t happen every day. Nonetheless, they’re possible and you could lose all your money if you aren’t smart with it. Since we mentioned real estate – investing in apartments and offices is great, but real estate investments are slow to bring you returns – they’re a long-term instrument.
To balance between short-term and long-term ROI, while minimizing risk, you should invest in a mix of industries and assets.
I’m searching for a new place to allocate some of my free funds. I read about P2P lending – what is that?
We have a very informative article about the history and mechanism of P2P lending. Depending on the platform you use, the setting could vary a bit, but in iuvo’s case, P2P lending means connecting loan originators with investors through a web platform. An originator equals a non-banking credit company that offers loans to end customers or small businesses.
With instruments like iuvo, loan originators get the chance to receive external financing and thus be more flexible in offering their services. They publish a portion of each loan they give out to borrowers, and investors can “buy out” a percentage, in exchange for receiving the interest with each down payment.
P2P lending is a good diversification instrument, because it’s easy to use and it brings stable returns, while being relatively low-risk. Loan originators are obliged to publish details about each borrower, like their age, monthly income, risk rating, etc.; along with information about the loan interest and payment plan. This allows investors to make informed decisions. At the same time, most platforms offer a Buy-back guarantee, which ensures that in case of loan default, you will get your initial investment amount back in up to 61 days.
Investing in P2P loans is also a great alternative to traditional savings instruments. It’s as secure as putting your money towards a bank deposit, however it brings you decent returns, along with high liquidity. Unlike deposits, you don’t need a big initial amount of free funds, and you don’t have to wait for years until something happens. You can exit or enter new investments all the time, choosing new loans from the platform, and leveraging your earnings as you go. Depending on the risk you can stomach, you could reach an average of 8% ROI through iuvo or even up to 15% if you’re brave.
At iuvo, we pride ourselves in being one the most progressive P2P platforms in continental Europe. We based our operations in Estonia, as this is currently one of the few countries that has a regulatory framework for P2P lending. All companies we partner with go through a complex compliance procedure, so that we can ensure our users’ funds’ safety. Our originators are obliged to retain 30% of the sum of every listed credit, mitigating the risk for investors.
We welcome both newbie and experienced investors to give iuvo a try. You can start with as little as 10 EUR, and our amazing customer service colleagues will guide you through if you need help. Register today!