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The Five Best Investments (One Is Better Than P2P Lending!)
This is a brief look at all your quality investment options. I also make the case that there's one form of investment that trumps the rest. And – to be candid – it's not P2P lending.
Four of the five quality investments that everyone should consider
We'll start with the four runner's up before coming to the number one investment:
| Form of saving/investment | How you might use it |
| 1a. Savings accounts/cash ISAs – easy access. | For emergencies and expenditure in the next 12 months or so, although usually falling behind inflation. |
| 1b. Savings accounts/cash ISAs – fixed rate (fixed term). | When you have specific goals in mind over the next few years and can afford to tie up the cash for that period. |
| 1c. Savings accounts/cash ISAs – inflation-matching. | If you're quick enough – on the rare and fleeting occasions that accounts guaranteed to track, match or even beat inflation are available. |
| 2. Buying your own home. | The financial advantage of buying your own home (provided you're stable enough to stay there and cope with rising mortgage rates) is massive over several decades – even if you buy at a peak just before a property-price crash! Mostly because you'll eventually own outright and won't pay rising monthly rent till you die. |
| 3. Cheap, index-tracking share funds/share ISAs/pension. | Investing regularly and for at least 10 years – preferably a lot longer – in a selection of tracking funds to maximise chances of beating inflation and growing your pot. |
| 4. Online lending, including peer-to-peer lending/IFISA lending. | Lendig in a basket of 6-12 different accounts is for more stable, less volatile returns than investing in stocks, but still with exceptional chances of beating inflation and growing your pot. |
Of course, there are dozens or even hundreds of other ways to save and invest, but all the above investments have four important traits in common that are a true rarity in the world of savings and investments:
- If you shop around, you can find a low-cost way to get a fair return for the risks taken, especially when taking into account hidden costs.
- They're easy to understand relative to other investments, which means that you can balance the risks with simple, sensible strategies.
- You have plenty of choices that do what they say on the tin. (Contrast that, if you know much about investing, with structured investment products like guaranteed bonds and “with-profits” funds. Horrible stuff that cover up how much money ends up in the investment provider's pocket at investors' expense.)
- Each of these investments are non-speculative, meaning they actually have utility. Savings accounts help make banking work, buying your own home gives you something to live in (and the next person whenever you sell), share funds make you a part-owner in businesses that sell products and services, and money lending providers borrowers with cash to fund the projects they need to complete.
Between those types of investments, you can create pretty much any spread of risk and potential reward you want. Indeed, you don't even need to use all of those options to do that.
Did you know the name 4thWay comes from the “4thWay to save and invest”. That's online direct lending such as P2P lending. The three other ways are buying your own home, shares and savings accounts.
Peer-to-peer lending lower risk than picking stocks
This has only become clearer over the 11 years since I originally wrote this article, as more evidence has piled up about P2P lending results.
It's been positive returns overall every year for P2P lending while the stock market had several losing years. And returns have even been greater than the stock market over the period.
Clearly it partly depends who you lend to (or more importantly that you lend in enough loans and lending accounts to contain risks) and whether you'll ever decide to lend if interest rates get crazy low.
In my view, one of the main differences is the way that psychological risk is more easily contained. Because it's our psychology while investing that usually costs people – including very smart people – most of their gains and converts profits to losses.
I'll give you an example.
If you lend through a half-dozen or more high quality P2P lending accounts, or if you use a portfolio of stock-market trackers, you might be as liable as anyone else to panic and do the wrong thing in times when things don't appear to be going so well.
However, if you panic in P2P lending, it could cost you a lot of money, but it's often hard to sell at a fraction of the loans' worth, even if you were willing to do so. Therefore, in bad times, you're often stuck with your loans till the borrower eventually repays them – when you find out that actually it wasn't all that bad after all, that your overall results across all your lending are OK, and the panic was OTT.
In contrast, with the stock market you can easily hit the red button when prices have plummeted 20% and you're virtually guaranteed to have buyers at the other end snap up those bargain shares. The transaction was sudden and irreversible. A few years later, when looking at the FTSE 100 graph trajectory, you see that the instant you sold was actually a very good time to buy!
Index trackers (including ETFs) are an excellent, excellent product for those of you who learn not to care less when the stock market falls 30%, riding out those storms.
If you don't know, an index tracker or “stock-market tracker” is a fund that spreads your money across dozens or hundreds of stocks (or emulates doing so). These follow a benchmark, such as the FTSE 100 or STOXX Europe 600. Over the long run, investing regularly, you can expect to do just fine with a basket of trackers.
Funnily, despite the monotony of it, it's extremely well proven that you can expect to outperform the vast majority of professional fund managers over the long run with trackers. And trackers do even better when compared to private individuals who pick stocks themselves!
#1: so what's the best investment?
The best investment is not P2P lending. It's not a stock-market tracker or your property. It's not even a government-backed inflation-beating savings account.
The best investment is all too often overlooked: it's you!
Before you put a load of cash into anything, consider what you could invest in to develop yourself or your career. I mean doing a course or reading books to improve your knowledge, give you an edge, and break out your career and earnings, or make your earnings more future-proof.
And that also enriches your life with greater wisdom, self-confidence and assurance After all, no-one can take your knowledge away from you.
Find the right personal path and that investment will give you an astounding rate of return for very little risk.
Read more
The Right Split Between Savings, P2P, Shares, Property.
Peer-to-Peer Lending Vs Other Investments.
Pages linked to in the content above
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.
The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.
