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Would You Diversify Your Investments through Crowdfunding?

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First of all, I love investing in the stock market. Sure, it can be volatile, but over the long term, the return can be very rewarding. I started investing in the stock market in 1996 as soon as I started working. At first, I invested in company stock and random mutual funds in my 401k. Then I branched out and invested in individual stocks and more random mutual funds in my taxable accounts. These were my learning years and I won some and lost some. Honestly, I probably lost more often because I started around the dot com bubble era and I didn’t have a good investment strategy.

Eventually, I settled on a simpler strategy. Now, all of our retirement accounts are invested in low cost index funds. These are spread across US and international stocks, REIT, and bonds. Most of our taxable investments are invested in blue chip dividend stocks. We also have 2 rental properties which should pay off in the long run. Lastly, I have a small amount in P2P lending because I wanted to experiment. It also provides some diversification from stocks.

crowdfunding investment

Diversification

Talking about diversification, there are many more ways to invest now than in 1996. The investing landscape has changed quite a bit and investors have a lot more choices in the 21st century. Technology has made many exclusive investments much more accessible to the average investor. Personally, I think most investors should put the bulk of their money in low cost index funds. That’s the easiest way to invest and it works well for your retirement accounts. However, if you have extra money to invest, then check out these alternatives to get a little more diversification in your portfolio.

Hedge funds

In the past, hedge funds were reserved for the very wealthy who could invest over a million dollars into one fund. Now, through new startups like Sliced Investing, it’s possible to start investing in a hedge fund with as little as $20,000. Investors can join Slice Investing start browsing their hedge fund offering with just a few clicks.

The advantage that hedge funds have over index funds is their flexibility to employ advance trading strategies such as short selling and event driven trading. I have no idea how to use derivatives and I don’t have time to follow the stock market that closely. I’m sure most individual investors are in the same position. Generally, hedge funds aim to protect the investors during the down years while also capturing a majority of the upside in the bull years. The stock market has performed very well over the past 5 years and we will see a big downturn at some point. Hedge funds can alleviate the pain during the down years. Their aim is to provide diversification from the stocks and bonds. Of course, the result will be dependent on the fund manager and his/her strategy.

Real estate

Another investment that technology has made available to investors is real estate investing. In 1996, if you wanted to invest in real estate, you had to put some money down to buy your own property. Well, you could invest in REIT, but we’ll get back to that in a minute. Now, you can invest in individual commercial properties through crowdfunding companies. You can pool your money with like minded investors and invest in various projects like a B&B rehab, a mobile park, or a strip mall. Of course, you would have to do some homework to see if the risk is worth it.

How is this different from REIT? When you invest in REIT, you are investing in a company and you’ll get a dividend payout. REITs are publicly traded and will be affected by market fluctuation. On the other hand, if you invest in a property through a crowdfunding site, you’re investing in that property. One caveat is that your funds might be tied up for some time, depending on the project.

Venture capital

If you’ve been following Retire By 40, then you’d know I love the TV show Shark Tank. It’s fun to see entrepreneurs pitch their products to venture capitalists and see the sharks fight over a great product. Now you can be one of the sharks, too! Through crowd funding, you can invest in startups and shoot for the moon. Of course, this is a risky investment. I heard somewhere that less than 1 out of 5 investments pans out for the venture capitalists. It can also take years for a startup to make it big. For me, I think I’ve had enough of start ups. I invested in a friends’ company and it never panned out. The stock I paid 10 cents for are worth about 0.01 cents now.

*You have to qualify as an Accredited Investor to invest in any of these investments. This means your net worth must be over $1 million (excluding the value of your primary residence) or your income exceeded $200,000 in the last two years.

Technology has come a long way

Technology is quite amazing. Crowdfunding is making all these previously exclusive investments available to a lot more investors. Previously, you’d have to write a million dollar check to invest in most hedge funds. Now, you can try hedge funds out with $20,000. These investments could provide some diversification from your normal index funds. It’s great to be able to invest a relatively affordable amount and see if a particular investment is a good fit for your investment style. If a hedge fund works out, then you can always reallocate and move more money there. For now, I will keep the bulk of our investment in the boring old index funds. However, I wouldn’t mind trying some of these crowdfunded investment out and see if it’s the right fit for us.

What do you think about these crowdfunding investments? Would you diversify your investment with these new options? 

Disclosure: This blog post was written for Sliced Investing pursuant to a paid content arrangement I have with the company’s representatives as part of an effort to raise awareness about alternative investment options.

Image credit: flickr by Rocío Lara

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 20 comments… add one }
  • ravi February 28, 2015, 12:22 pm

    It’s probably best to realize that p2p (mainly prosper and lending club) are relatively new platforms, so the largest risk is something we haven’t seen yet.

    We’ll see. It will (hopefully) work out, and to me even 6% nominal returns are solid if they don’t correlate very strongly with stocks. Right now I’m close to 12% of my invested assets in p2p, and this should drop to ~10% by the end of this year. Once I close out one account, I think I’d be most comfortable with ~6% in p2p in 2 years or so. The returns are juicy, but I think it’s prudent for most investors to be at +/- 5% while understanding the risks involved.

    • retirebyforty March 2, 2015, 10:14 am

      P2P lending had a lot of trouble during the last financial crisis. The default rate rose quite a bit and many people lost money. You have to average the high return during the good years with the low return during the bad years.

  • freebird February 22, 2015, 9:16 am

    I think the general rule when choosing investments is that costs matter, so I guess that’s my question to your sponsor– what does it cost to own a fractional share of a hedge fund? I imagine this would include both the hedge fund fees (which I would expect to be far higher than those of passive index funds) plus additional fees for the intermediary. How much alpha does it take for the end user to break even, and what percentage of the hedge funds on offer have beat this threshold? I’m a bit skeptical because this arrangement sounds like little more than a new name for active management.

  • No Nonsense Landlord February 21, 2015, 6:10 pm

    I would stay away from the crowd funding. It seems to be a bit risky. And how do you do due diligence correctly? A lot of scammers out there, even for the professionals.

    An index fund is better.

  • Karen February 20, 2015, 4:49 pm

    I’m a huge fan of Dragon’s Den, the Canadian version of Shark’s Tank. I think Kevin O’Leary, an original Dragon, is on Shark’s Tank. I think the idea of crowdfunding is very interesting, however it is very risky and at this point, I don’t have enough capital to put it towards startups. I’ll wait till they become bigger and then possibly buy stocks when they have an IPO.

  • Vivianne February 20, 2015, 9:14 am

    Not to be negative about this but, there are stories to be remembered:
    When the housing market crashed, CNN posted a story about investors including doctor got pulling into the housing boom, and builder never finished out the project, they ended up losing their life saving

    Remember Murdoch? He cooked 4 different books. Kevin Bacon and the whole band wagons of retirees got only a little bit out of whatever left the government recoup from it. I watch CNBC – corporate greeds, many stories where they could never catch the cooks after they flee with the money

    Just recently CNBN post the story of Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm’s capital—down from the roughly $100 million.

    Remember the dotcom? where everyday an internet company pop up, then really get popped.

    Uhhhh… It all came down to this: Do you have $20K to lose? Yep! Then sign up! Because it might pop more than your 10% index fund and all the benefits as listed above.

    Would I? Nah, I don’t have the spare $20K at the moment. I keep my feet on the ground.

  • RA50 February 20, 2015, 8:48 am

    Hi Joe,

    The crowdfunding is something that interest me for a couple of months now, I am looking at the best site to look for, but definitely is something that will enter before the end of the year.

    P2P in Europe is not something that is developed yet, so I will not venture in this field.

    Regarding real estate is too expensive to enter directly but our banks are proposing different real estate fund, it’s something that I had in the past but never really make too much money from fund dividends. At the moment, our real estate market is very close to an explosive bubble, so better wait for a while.

    Will keep you posted on our blog about new diversification opportunities as now we are at 90% in stock market.

    Cheers, RA50

  • Money Beagle February 20, 2015, 7:15 am

    I think the risk reward ratio is very much toward the risk, in that you will likely not get your money back or make a return in a vast, vast majority of cases. But on the one that strikes gold every once in a while, it could be worth it. I guess you just have to be smart, lucky, persistent, or likely a combination of all three.

  • so February 20, 2015, 5:42 am

    Alternative investment (and even rental RE and single stocks) are too much of a time investment to do well for most people. hedge funds and investing in startups are sexy but not all that renumerative when you look at the failure rate. If I wanted to make that kind of bet, I’d take $20K to Vegas, buy a $500 steak dinner, and put $19,500 on the roulette wheel.

  • Dave in Sunny FL February 20, 2015, 5:12 am

    I didn’t care for this article, and appreciate the disclosure that this is paid content. Are you saying that peer to peer lending is the same thing as Crowdfunding? When you’ve mentioned P2P lending, I’ve thought that it sounded like a lot of investment in due diligence, for a rather low payoff in interest, and given the small amount of capital invested in a given loan. As far as diversification, you need to identify what risk you are diversifying from. I don’t expect P2P folks who can’t qualify for loans from more traditional money sources to outperform the general economy or stock market in an economic downturn. Buying gold or real estate against inflation, consumer staples stocks against recession, or put options on your high-flying tech stock shares; these are diversification (hedges) I can understand.

    • so February 20, 2015, 6:11 am

      “I don’t expect P2P folks who can’t qualify for loans from more traditional money sources to outperform the general economy or stock market in an economic downturn. ”

      Bro, that there makes a TON of sense.

    • retirebyforty February 20, 2015, 9:55 am

      Yes, P2P lending is crowdfunding. Actually, I’m pulling back from P2P lending a bit. It’s probably not a good diversification because the default rates will probably rise too much during a economic pull back. Hedge funds should be a good diversification from the stock market. Their aim is to soften the blows during the bear years.

  • Jon February 20, 2015, 5:09 am

    I currently have a rental property, so real estate is something I would consider in the future to diversify with again. But when it comes to hedge funds, the tax consequences and moving parts are too much for my liking. I’ll just mainly stick with my boring index funds and call it a day.

    • retirebyforty February 20, 2015, 9:52 am

      I think if you can ride through the bear markets, you’ll be fine with index funds. The hedge funds help nervous people through those bad years.

  • Elias February 20, 2015, 4:29 am

    Joe,

    Investing in startups can also be very rewarding. I happen to be an entrepreneur and when I wrote my business plan and tried to raise capital, only one of my friends believed in the project. Everyone told me how startups don’t work, how most fail, and listed all the reasons why it wasn’t going to work out. It was slow going at first, but after about 18 month of not giving up, I scored my first investor (outside of my friend). He was a notable investor and it helped me from that point forward closing additional capital. My friend who invested $50,000 in August 2008 in my startup is now going to receive about $2,000,000 based upon our current valuation. I am in the process of selling the company, and should exit by summer.

    This year we made it in the top 20% of the INC 500!

    Over the last two years, I have personally invested in 2 other startups. After building a company, I feel I know what qualities to look for in both management, as well as the business/market. I plan after I exit to invest 20% of my money over 5 years in startups. I feel it’s a great way to leverage my knowledge as well as give back to society.

    • retirebyforty February 20, 2015, 9:51 am

      Congratulation! That’s a great story. Your experience is very helpful in evaluating startups. I don’t think many investors have that kind of insights. Thanks for helping the startups.

  • RetiredToWin Alex February 20, 2015, 3:59 am

    I do have a crowd funding “position” in my investment portfolio.

    My overall investment strategy is based on a roughly equal-weighted portfolio of 16 individual dividend stocks. But about a year ago I found myself with a windfall real estate profit and no “room” in my stock portfolio to invest it. So, after some research, I invested it in 1200 Lending Club loan positions of $25 each.

    My expectations for that investment were/are very modest. It was either the Lending Club experiment, or the measly interest yield of a savings account. On that basis, I am well ahead. So far. But, as you know, with loan defaults to take into account it ain’t over ’til its over. It’s still an experiment.

    • retirebyforty February 20, 2015, 9:49 am

      Thanks for sharing. The worry I have with peer to peer lending is what happens when the economy turns south? I would expect a lot more defaults. I’m pulling back a bit with my P2P lending.

  • Stefanie, The Broke and Beautiful Life February 20, 2015, 2:37 am

    20k is about 80% of my retirement accounts. I wouldn’t be willing to risk that in such a volatile investment. I wonder if I’d still think that if 20k was only 5% of my total portfolio?

    • retirebyforty February 20, 2015, 9:47 am

      I wouldn’t risk 80% of my portfolio. Hedge funds shouldn’t be volatile. The goal is to be less volatile than stock, but it’s all dependent on the fund manager, of course.

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