Not too long ago, when you wanted to invest in the financial markets, you had to call up your bank, broker or investment advisor and had the choice between investing in stocks, bonds, money market securities or mutual funds. Fortunately, the investment landscape for private investors has expanded greatly since then and, thanks to the emergence of fintech (financial technology) in the last decade, you now have a whole new range of new investment vehicles you can invest in to generate strong annualized returns. In this post, I would like to share with you five innovative ways to invest your money.
Low-Cost Automated ETF Investing Using Robo-Advisors
One of the key developments of the booming fintech sector has been the emergence of so-called robo-advisors. Robo-advisors, such as MoneyFarm in the UK and Betterment in the US, provide online wealth management services that offer fully automated, algorithm-based portfolio construction and investment advice, without the need for a human financial advisor.
The way robo-advisors work is you sign up to their online platform and fill out a questionnaire that assesses your risk profile. Then, once you approve your risk classification, the algorithms then present you with a possible ETF-based portfolio for you to invest your money into. If you are happy with the presented portfolio you can then deposit money into your robo-advisor account and invest it in that portfolio. The whole process of signing up to being investing in the financial markets can take as little as 15 minutes when using a robo-advisor.
One of the best things about investing using robo-advisors, aside from their low fees compared to traditional mutual funds, is that you can set up automated monthly payments into your diversified ETF-based portfolio so that you can benefit from the power of compound interest. Let me briefly elaborate on that. If you invest, for example, USD 5,000 into a diversified portfolio and add USD 200 in it every month, at an annualised rate of return of 5% and your investment horizon is 10 years, then after 10 years your portfolio will be worth almost USD 40,000.
I personally invest using the UK-based robo-advisor MoneyFarm, which allows me to put my ETF portfolio into a tax-free stocks & shares ISA. So, not only do I benefit from their low fee structure and the power of compound interest, but also my investment returns will be tax-free (as part of my ISA allowance). Furthermore, I find their new smartphone app very useful to check in on the performance of my investment portfolio.
Social Trading is a new innovative way of trading the financial markets. It refers to using financial social networks that allow you to copy trades of successful traders to generate trading profits. This concept is very new and is another offspring from the recent boom in the fintech space.
The way social trading works is you sign up to a social trading platform, such as the one of the market leader eToro, deposit cash into your trading account and browse through the most successful traders on the platform. On the platform, you are able to see what securities each trader has been trading, their performance, their risk tolerance and how many people are copying their trades. You can also engage with the traders and discuss trade ideas and market developments. Then, once you have chosen the traders that you deem to be the most successful and have a risk level similar to your own, you can set up the system to automatically copy these traders’ trades. That way your trading returns will mirror theirs.
The key to successfully trade the financial markets using social trading is to copy a range of profitable traders that have a similar view on the market and risk tolerance as yourself.
Peer-to-peer lending, also known as P2P lending, refers to a method through which small and medium-sized businesses and private individuals are able to borrow money from private investors without the use of a traditional financial intermediary. This enables debt financing for those who are finding it hard to secure a bank loan. On the flipside, individuals who lend money through peer-to-peer platforms can generate strong fixed interest returns, with low transaction fees and a low correlation to stocks and bonds.
The way peer-to-peer lending works for investors is very straightforward. First, you decide how much of your capital you want to allocate to peer-to-peer lending. Then you sign up to an online P2P lending platform, such as Lending Club (US) or CrossLend (UK), and look through each of the listed lending options. Once you have found investments with the right risk-return profile given your risk tolerance, you invest a share of your P2P investment capital into each investment. It is best to diversify within P2P investments to reduce idiosyncratic (single party) borrower risk. Once you have made your investments, the interest payments and the repayment of the principal amount at the end of the investment period will be handled by the P2P lending platform.
P2P lending provides an excellent way to generate strong annual fixed interest returns, which are uncorrelated to the performance of the stock and bond markets. Especially in the current low interest rate environment P2P lending allows you to get ‘more bang for your buck’ in the fixed income investing space.
Angel investing refers to investing in start-up companies and SMEs as a private investor. This is something that has previously only been available to wealthy and influential individuals but now, through the use of online crowdfunding platforms, anyone is able to invest in young companies that they believe in. Crowdfunding refers to the funding of projects or businesses using small contributions by a large number of individuals. Examples of popular crowdfunding platforms are CrowdCube and Seedrs in the UK and OneVest and Crowdfunder in the US.
The way angel investing works using online platforms is that you choose start-ups that you believe have the potential to become market leading companies in the future. Then, you decide how much you would like to invest per start-up and once they have managed to raise enough capital from angel investors and their funding round was a success, you will be awarded your shares in their business. The way you can monetize your angel investment is either if the company ‘goes public’, i.e. decides to become a publicly-traded company listed on the stock exchange, at which point you can sell your shares at a profit or if the company is bought by another company.
Angel investments are great for diversification as they have a very low correlation to stocks and bonds. However, they are illiquid, high risk and only for long-term investors. Hence, it is best to only allocate a small part of your overall investment capital to this asset class.
Micro Investing – Investing Your Spare Change
US-based fintech company Acorns provides an excellent new investment service that allows you to “invest your spare change” into a diversified portfolio of low-cost ETFs (exchange-traded funds). Since there is no minimum amount you need to start investing, it allows anyone to start their investing immediately. This makes it a great service for millennials, college students and even high school kids who want to start their investment careers early. The way it works is that you connect the Acorns app to your card and whenever you make purchases the algorithm rounds up the spare change of your purchases and automatically invests it in your chosen investment portfolio.
If you hold less than USD 5,000 in your portfolio you only pay USD 1 fee per month. Above USD 5,000 you pay 0.25% annual management fee, which is very reasonable compared to the vast majority of traditional investment management companies. If you are at university, however, your account is free.
Disclaimer: Whenever you invest your money (whether in stocks, bonds or any of the above-mentioned investments) your capital is at risk.