Traditionally the stock market has been the 'go-to' space for investors to build a portfolio and see long-term returns. However, the recent COVID-19 pandemic has seen the stock market plummet, sending many investors into unprecedented uncertainty and considering alternative avenues to invest in.
Our main message for those considering a change in strategy, is that when it comes to investments (no matter what kind), there is always a risk to consider. It's absolutely crucial to do your research before making any decision, and even in a situation like COVID-19, stay calm and take your time with due-diligence before locking anything in.
Fortunately, if you're considering an alternative investment strategy, we've done a bit of the leg-work for you by putting together a list of some of the different and viable investment avenues, as well as their associated risks and rewards. If you have any questions at all, or would like further information on the peer-to-peer lending option in particular, feel free to get in touch with our team.
Why are people searching for alternatives to the Share Market?
As we're seeing traditional investment strategies hit by the global pandemic COVID-19 with New Zealand shares slumping by more than 10 per cent for the first time ever after the Level 4 Lockdown was introduced. Similar trends have been observed globally, with more than eight years of gains on the FTSE 100 wiped out in barely a month, and the index plummeting to its lowest level since 2011.
In short? The volatility of the current stock exchange is making many investors reconsider where they are placing their funds.
Peer-to-Peer Investing
Peer-to-peer investments are a great option if you're looking for a shorter-term return on your investment. With this type of investment, investors have the opportunity to lend money directly to a borrower, and earn monthly interest payments each time the borrower makes a payment. Typically, the return is higher than that of a term-deposit offered by banks, although the risk is different. For example, where banks may only offer a 2.00% yield, peer-to-peer investments may offer returns upwards of 5%.
Of course, the risk involved is the chance that the borrower is unable to make their monthly payments, and defaults on their loan. Here at Southern Cross Partners, we have quite robust systems in place to mitigate that risk. For example, all of our loans are credit checked and approved by our finance team, and backed by mortgage security over the borrower's property. However, there is the chance that the borrower’s circumstances or the property value have changed to such a degree that we are not able to recover the full loan amount from the borrower or on a mortgagee sale, and your investment may be impacted by the shortfall and you may not receive full repayment of your investment. This is why we monitor the level of lending, or Loan to Value ration (LVR) on each property carefully to try and avoid such an occurrence.
Peer-to-peer lending is an excellent way to make relatively high returns in a shorter period of time than the stock market would offer, with the added security of an existing mortgage to secure your return.
For more information on the risks and measures taken to mitigate these, take a look at our recent blog; Understanding the Risks of Peer-to-Peer Lending.
Term Deposits
Term deposits are a sum of cash invested by you, the investor, held at a financial institution such as a bank or credit union, and held for an agreed-upon and fixed amount of time (from as little as one month, to 5+ years). These are a great opportunity if you're looking for a relatively low-risk alternative to the stock market, as there's a lot less volatility in the term deposit market and your interest rate is specified and unchanging regardless of rate drops in the interim.
There are two significant drawbacks or risks involved with this type of investment. The first of which is that you're unable to withdraw your funds once they have been deposited. Usually, if you're experiencing hardship you can apply to withdraw, however you'll often pay a penalty to do so, or have you principal repaid without interest. Secondly, the rate of return is typically quite low, sometimes even less than a regular savings account may offer. In addition to this, to find out the real rate of return, you'd need to subtract the current inflation rate from the interest rate paid. For example, if inflation was running at 1% and your term deposit was paying 3%; your “real” rate of return is 2%.
If you're looking for a short-term investment, with a low buy-in and low-risk, and are willing to pass up on higher returns, then a term deposit could be a good investment. However, it's always important to weigh up risk and reward in comparison to other available opportunities.
Investment Properties
A tried and tested method of growing equity through investing, is the property market. With foresight, planning and the right mindset, property investment can yield a very high return at the end of a long period of time. Typically, investors will look for property to buy in an area with a high demand for housing so that they're able to quickly rind tenants and recoup the mortgage repayment costs, as well as an area that shows a steady growth in property value over time.
The return on investment in the property market can be quite high, especially when growth in equity is considered, however it's important to note that the cost of initial investment is far higher than most other investments, requiring tens of thousands to purchase property and often a stake in the property market already. In addition to this, the housing market isn't fixed, and as COVID-19 has shown us, the value of property is not guaranteed to stay even or increase over time. Finally, to see significant returns, it usually takes a longer investment period, which means your money will be tied-up in your property for potentially decades.
Investment property can be a good strategy if you have the initial capital to invest and you're willing to look at a long-term plan. However, if tenants are a part of this game plan, it's quite difficult to be a passive investor in that way that peer-to-peer lending and a term deposit would afford.
Foreign Exchange Trading
As defined by the NZ FMA, "Forex trading is the buying and selling of foreign currencies. People trade in Forex either to try to make a quick profit by betting on the changing value of a currency or to provide certainty about the cost of future foreign currency payments (called ‘hedging’)." This is a high risk, but fast-paced investment strategy. The returns can be lucrative, as the foreign exchange market is the largest and most liquid market in the world, with an average daily volume in excess of $6 trillion.
However, it's important to be aware of the risks involved with this investment strategy. The foreign exchange market has notoriously high levels of volatility, as there are so many factors that can influence the strength of any given country's dollar. For example, you may have noticed when COVID-19 reached NZ shores, the NZ dollar dropped from $0.67 against the USD at the end of December 2019, to $0.57 in mid-march - quite a significant change.
If you're considering investing in Forex Trading, experts recommend considering an EFT and consulting with your financial adviser first, as while this methodology can show quick returns, it is also extremely high risk and somewhat unpredictable.
So you'd like a stock market alternative?
That's great. As we said at the beginning of this blog, it's really important to do your due-diligence and understand the risks associated with each kind of investment. Always consult with your financial adviser first, and try not to act too impulsively.
If you'd like to look further into peer-to-peer investing as an option, we'd be more than happy to talk you through it and answer any questions you might have. You can get in touch, below!
