Fixed Income Investments
As every investor knows, there are a lot of options for your investment dollars. Most investors are familiar with options such stocks, bonds, real estate, gold and a few other common choices. The types of investments one chooses are based on risk and reward preferences and the economic outlook. The possibilities and combinations are limitless. Even within a particular area there are many choices and decisions that need to be made. The considerations are no less complex just because you have narrowed it down to one type of investment.
For example, within fixed income investments, also known as bonds or debt instruments, there are many options with different levels of risk and return. Some of these are well known while others are newer and not as widely understood.
Many investors opt for buying corporate or government bonds directly from the issuer, which is either a company or a government (which can be federal, state or local). The down side to this method is that bonds are expensive so an investor may not be able to diversify easily. Also, it is difficult to reinvest dividends.
The challenges with buying bonds directly can be eliminated by purchasing shares of bond mutual funds. These funds exist for every type of bond imaginable, including domestic and foreign governments, corporate, high risk, and many more. These funds by large numbers of bonds so a few defaults do not have a significant impact on the return of the fund. Also, they can reinvest the interest payments immediate as they are dealing with a large amount of payments. These are very popular fixed income investments that most diversified investors include in their portfolios.
The problem with bond funds is that many investors feel they do not earn a sufficient return. Interest rates have been well below historic norms for over 10 years and this has made bonds an unattractive investment, especially for people who are attempting to use this income for their living expenses. One alternative that many investors are discovering is investing in peer to peer loans. Peer to peer lending, also known as P2P lending investing, or social lending allows investors to put their money in a large number of personal loans to regular people borrowing to payoff credit cards and other reasons. The interest paid by borrowers goes right to investors and they can reinvest it in new loans. The interest rates paid to lenders range from 6% to 27%. While default rates are high for the risky loans, the overall return to investors can be significantly higher than other forms of fixed income investments. For this reason, many people are turning to p2p lending investing as a source of better returns. The industry has grown a lot in the last ten years and is now issuing billions of dollars in loans every year.
If you are considering fixed income investments or have already chosen some for your portfolio, you may want to reconsider some of your choices. Peer to peer lending investing is an alternative to traditional bond and debt investments. There may be ways to enhance your portfolios return without adding a significant amount of risk. Furthermore, in certain regions or economic climates there may be good reason to change your investment mix from time to time.