Marketplace Lending: A high return investment in a low interest world
Recent months have seen historic slashes to the official interest rates by the Reserve Bank, and it’s keeping some of us up at night. The world is in an interesting place geo-politically, and we’re even seeing negative interest surfacing in Europe. Whether local rates will dip negative is anyone’s guess. Either way it means cash savings are worth even less than normal. Unless you’re five minutes from retirement, it’s worth considering whether your investment strategy makes sense in a world of low or negative interest rates.
Low interest rates are neither good or bad. They can help increase consumer spending, but they’re typically only lowered in a sluggish economy. Unfortunately, increased spending won’t always fix an underlying problem, so don’t bank on an economic turnaround. If you’re investing to build wealth, a good rule of thumb is to increase your risk profile when rates are low. This moves your money away from stagnant investments like cash, into potentially higher yield investments that benefit from increased consumer spending, like equity markets.
‘Standard’ high yield investments might be Australian and overseas shares, although a shifting dollar makes the latter riskier. Of course, shares can also drop in value quickly, especially in a volatile global climate, so it’s still a risky option. Real estate might be tempting in any other period of low interest, but with the state of the Australian housing market, it’s far from a sure bet.
So where does that leave investors? In a tough spot, frankly. Luckily, the Fintech boom of the last few years has brought with it some alternative investment opportunities.= Marketplace lenders, of which Marketlend is one, allow individual investors to fund loans parts to growing Australian business. This lets investors get a more direct slice of what a bank would typically do with their cash savings, ie lending to businesses.
Unlike some investments, our returns don’t fluctuate wildly with interest rate movements, as our client base is significantly different to the banks. Unlike the banks, we take the time to get to know our borrowers (things like strongly projected growth matter to us), and don’t require property collateral from our borrowers. We’ll never lend to a company that couldn’t find fiance elsewhere, but we do often lend to businesses that banks wouldn’t. As a result, our rates are more stable. For investors, that means our typical 8-12% returns are maintained, even through periods of low interest rates.
By backing working companies, marketplace investors invest in a sector that can continue to grow in a period of low rates, by taking advantage of increased capital flows. Unlike shares however, the value of a loan part won’t fluctuate based on the state of the economy or the whims of the market. Certainly any investment comes with some risk, but we take serious precautions to secure our loans. We make a point of putting our necks on the line too, by investing in every business we list on the platform.
If, as an institutional or sophisticated investor, you’re finding it difficult to balance your portfolio in the current climate, it may well be worth seeing if alternative investments like marketplace lending could suit your needs.