When you’re trying to get the best return on investment, you need to think outside the box for new investment options and platforms that offer a balanced mix of risk and reward for your portfolio. The key to consistent and maximal returns is diversity. But, why limit yourself to the usual mix of stocks, bonds, and mutual funds managed by a financial planner when there are so many other options out there – like a robo advisor?
Robo Advisors vs. Peer-to-Peer Lending
Robo advisors and peer-to-peer lending are two awesome alternatives to the traditional financial planner model because they not only implement top-notch technologies and research to maximize gains for their investors. But, they could also offer more favorable returns than if you were to only invest in what you know.
This isn’t to say you should abandon your financial planner altogether, but your financial independence goals demand a diversified approach to make them a reality. To help you decide whether robo advisors or peer-to-peer lending might be worth adding (not replacing) to your current portfolio, here are some advantages and disadvantages to consider:
Advantages of Robo Advisors
Robo advisors like Betterment are designed to make investing as easy as possible for anyone who’s willing to try it on their own. Using a high-tech algorithm to determine how to optimally allocate your funds, Betterment incorporates several different investment options, including the SPDR Dow Jones Industrial Average ETF, iShares S&P 500 Value Index ETF, iShares S&P 1000 Value Index ETF, iShares Russell 2000 Value Index ETF, iShares Russell Midcap Value Index ETF, and Vanguard Total Stock Market ETF.
Robo advisors are incredibly advantageous for investors because the fees are typically lower than a traditional stockbroker or financial advisor (the “robo” part means you don’t have humans with brick-and-mortar business expenses racking up fees for investors) and your account on the robo advising website provides a clear snapshot of your investment portfolio’s performance, with charts, simple calculations, projections, and recommendations to help even beginning investors interpret how their investments are performing.
Additionally, robo advisors like M1 Finance or Betterment offer advice based on your financial goals and you can set up both general investment accounts (e.g., mortgage savings) and retirement accounts (traditional or Roth) and watch the platform allocate your funds based on factors such as your age, continuity of contributions, and long-term goals.
Check out my full review of M1 Finance to find out more!
Advantages of Peer-to-Peer Lending
The primary benefit of peer-to-peer lending is that the potential rewards are considerably higher than other types of investments. There are also many different peer-to-peer lending websites to choose from, such as Lending Club, Prosper, and Upstart. The minimum loan amounts range from $25-100 (you invest in a “note” or part of a loan), which means there is a low barrier for investors to get started in peer-to-peer lending.
Additionally, peer-to-peer lending programs don’t just lend money to anyone seeking a loan; they typically use proprietary systems that qualify borrowers on the basis of credit scores, debt-to-income ratios, and even academic performance (in the case of Upstart). The minimum credit score required for borrowers to seek money on peer-to-peer lending platforms ranges from 640-660.
Depending on the borrowers’ creditworthiness (the riskier the borrower is, the higher interest they’ll have to pay to investors), you could earn between 3-6% interest for top-rated borrowers or 13-28% interest for loans taken out by the riskiest borrowers (who might default, but there’s no guarantee). If you funnel your investments into the highest-rated borrowers who are the least likely to default, you could see consistent rates of return that are considerably higher than other investment options out there. Invest on the #1 Peer-to-peer lending platform in the US – LendingClub.com.
The newest robo-advisor on the market called M1 Finance gives the more established, sophisticated investors great investing options. M1 Finance simplifies the investment process for beginning and experienced investors alike. Unlike other robo-advisors, M1 Finance does not charge a fee, and it gives you the option of taking more control over your investments if you want them (and less if you don’t).
Disadvantages of Robo Advisors
The downside to robo advisors is that you have somewhat less control over your portfolio. This is not unique to rob -advisors, but it’s worth mentioning because you’re essentially beholden to the robo advisors’ investment choices for your portfolio.
Luckily, you can still control the allocation (e.g., 70% stocks, 30% bonds), and access charts and graphs that demonstrate how the investments are performing over time. Another downside is that robo advisors aren’t immune to market swings, which means you’re not guaranteed a return on your investments (again, not unique to robo advisors, of course).
Disadvantages of Peer-to-Peer Lending
The biggest disadvantage of peer-to-peer lending is that it can be risky. You’re not investing in established companies and government entities – you’re investing in everyday people, which means they’re just as prone to default (if not more so) on their loan repayments as anything else (and they likely don’t have assets to give up in exchange for defaulting on their lenders).
Even if you avoid the riskiest investments in peer-to-peer lending – such as the borrowers rated C or lower on Lending Club’s platform – there is still the possibility of losing your money on these types of investments because human error and unfortunate circumstances can get in the way. Invest on the #1 Peer-to-peer lending platform in the US – LendingClub.com.
Ultimately, robo advisors offer comparatively safer investment strategies than peer-to-peer lending companies. Robo advisors’ investments come from established ETFs that ebb and flow based on the current market, but peer-to-peer lending relies on everyday people borrowing money and paying interest to investors as their business model, which arguably involves greater risk. While both options are certainly viable for investors seeking greater diversification for their portfolio, you should strongly consider putting more money into robo advisor investment accounts than peer-to-peer investments.