Facing (dis)savings, alternative investments

We have all heard the fable of the cicada and the ant. In the story, the ant worked and saved for the winter months, and the cicada sang and was carefree. The story’s moral pointed to the ant as the example to follow, but what if it was wrong? It is evident that work and effort are non-negotiable to obtain revenues and benefits, but what should we do with them? Should we do like the ant and save them?

The current situation is not the most adequate for saving. The coronavirus crisis has forced central banks to intervene with expansionary monetary policies. This measure stabilizes the economy but causes interest rates to fall. So much so that deposits and bonds (both public and private) show negative interest rates. Therefore, what were once forms of savings, today translate into a reduction of our income. Even by hiding our money at home, as the ant did, we would be dissaving in purchasing power due to the effects of inflation.

This situation forces us to change our income management. If it was necessary to assume a 3% risk to obtain a 3% return, now it is necessary to assume a 9% risk to achieve the same level of return. We must, therefore, carefully select the destination of our investments.

Although the current crisis has made saving harder, it has also encouraged the digitalization of the economy, leading to an exponential growth of alternative investments based on technological platforms. Now more than ever, it is important to diversify our investment portfolio to find the right balance between profitability and low risk. It is the ideal time to bet on some of the forms of alternative investment that have grown in recent years:

  • Equity Crowdfunding. Using this form, a company solicits capital through a digital platform, and investors who wish to do so contribute in exchange for receiving shares in future profits. At Fellow Funders, we have been helping startups and companies to finance themselves through this method for four years, so we have experienced firsthand the boom of this investment method.
  • Crowdlending. Similar to crowdfunding. In this method, companies use a group of investors instead of traditional banks to request a loan. In return, these investors charge the corresponding interest. Projects using this method usually offer an attractive return, with an APR that can reach 14 %.
  • Cryptocurrencies. The star trend. These digital currencies allow us to buy, sell and speculate. Other investment forms associated with these assets, such as creating our cryptocurrencies, investing in exchange-traded investment funds containing cryptocurrencies, or investing in blockchain projects with cryptocurrencies.
  • Alternative real estate investment. In recent years, two simpler and more viable forms of investment for smaller investors in the real estate world have gained relevance. The REITs, regulated in Spain since 2009, are companies that buy real estate to put it for rent, with the obligation to distribute 80% of the profits among shareholders through dividends. Another alternative is real estate crowdfunding. The objective of projects financed, therefore, is to buy real estate, revalue it, and sell it.

Although these are the most outstanding alternative financing methods today, alternative financing is a complex and diverse world. At Fellow Funders, we always recommend investing wisely and diversifying your investment portfolio. Considering that savings and fixed investments currently produce practically zero (if not negative) returns, we believe this is the best way to seek the best risk-return trade-off.

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