Business owners regularly have most of their net worth invested in their businesses. While it’s vital as an entrepreneur to believe in your business and to have ‘skin in the game’, it is a very risky approach to money management having the almost all your capital invested in your business given the high failure rate of small and medium-sized businesses. Hence, it’s important for entrepreneurs to look at other ways to invest their money to ensure their financial future is not solely tied to the success of their business.
Fortunately for entrepreneurs, the recent boom in fintech has created several new ways to easily invest one’s money. Fintech stands for financial technology and refers to an emerging sector that is using new innovative technologies to disrupt the traditional financial industry by offering better, cheaper and user-friendlier financial services. An area that has witnessed a lot of disruption in recent years is the wealth management industry.
Peer-to-peer lending refers to a method through which individuals and SMEs can borrow money from a number of private investors without the use of a traditional financial intermediary. This enables financing for those who are struggling to secure a loan from a bank, while individuals who lend money through peer-to-peer platforms can generate strong fixed interest returns. Peer-to-peer lending has grown in popularly after the 2008 financial crisis when banks drastically reduced lending to small and medium-sized businesses, but also because interest rates have been low for a long time and investors are looking for more yield.
Using peer-to-peer lending platforms, such as Lending Club or Prosper, you can invest in a range of loans and generate comparatively high fixed interest returns with low transaction costs and a low correlation to both stocks and bonds.
Low-cost ETF investing using robo-advisors
Alternatively, you could invest in a fully diversified ETF-based portfolio using a so-called ‘robo-advisor’. Robo-advisors are online wealth management companies that offer automated, algorithm-based portfolio construction and investment management advice, without the need for costly human financial advisors.
The way robo-advisors work is you sign up to their online platform, fill out a risk assessment questionnaire that determines your risk profile and their algorithms then compute a diversified portfolio composed of a range of different exchange traded funds. If you are happy with your risk assessment and the portfolio you then deposit money in your account and the robo advisor will invest it into the prescribed portfolio for you.
Robo-advisors, such as market leaders Betterment and Wealthfront, offer a user-friendly low-cost ‘hands-off’ approach to investing your capital in the financial markets.
While online trading has been around for quite some time, there have been several innovations in recent years that have improved online trading platforms for day traders and small investors. “Thanks to innovations in fintech private investors are now able to trade a broad range of asset classes, including forex, stocks, indices and commodities, using their smartphones or tablets ‘on the go’ at a lower cost than dealing through their bank,” according to Mark Priest, Head of Index & Equity Market Making at ETX. “The implementation of new financial technology has enabled us to meet traders’ demands for real-time securities pricing, faster delivery of timely market news, and we can now offer direct market access to our customers.”
If you have a strong interest in the financial markets, then online trading is an excellent way to generate additional income, especially in light of the strong performance of US stocks in recent years. The S&P500 Index, which measures the performance of the US Stock Market, has returned over 200% since March 2009.
‘Social trading’ is a new form of online trading that has sprung out of developments in the fintech industry. It entails the use of social data to help investors make trading decisions. More specifically, social trading refers to following successful traders with a social trading network, systematically copying their trading decisions and thereby replicating their trading performance. The industry leader in this space is eToro, but there are also ZuluTrade, Ayondo and Tradeo, which offer social trading networks.
The viability of social trading as an investment strategy has been substantiated by research conducted by MIT, which concluded that “social trades outperform individual trades.” Therefore, if you want to follow successful traders and replicate their returns, social trading is an excellent way to generate investment income without having to constantly follow the market.
Another innovative way to grow your wealth is through angel investing. Angel investing refers to investing in start-ups and small businesses through the use of equity crowdfunding platforms. Examples of crowdfunding platforms in the US would be OneVest, FoundersClub, and CrowdFunder but there are many more. For a business owner, picking out other successful businesses and investing in them should within their domain of expertise.
The way it works is you browse through businesses you would like to invest in on online crowdfunding platforms and invest in the ones you believe will grow into large reputable companies further down the road. Once these companies have completed their funding round you will be awarded your shares in their business. On most crowdfunding platforms you can start investing with as little as USD 10 although an initial investment of at least USD 500 would be advisable. The way you can ‘cash out’ your angel investment is when the company you have invested ‘goes public’, i.e. lists on the stock exchange and becomes publicly tradable, or another company buys it. In either of these cases you can look at a massive return on investment if you were an early angel investor. That way your USD 500 investment can easily turn into USD 10,000 or more.
However, angel investments are very risky as most start-ups and small businesses eventually fail. Hence it is best to diversify your angel investments and invest a few hundred dollars in a range of companies as opposed to putting a lot of money into one, in the hope that it will succeed.