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Stock (Equity) and Bond (Debt) Replacements

By Dr. Gerald House

FRI JAN 15, 2021

Financial advisors and investment managers should consider absolute returns in all market conditions, not just traditional asset classes, when building an investment portfolio for a client. Investment strategies necessitate the need to look outside the traditional stock and bond portfolios of yesteryears and include assets that are viable replacement vehicles (Alternatives) such as Crowdfunding (CF) and Peer-to-Peer lending (P2P). An investment portfolio's DNA cannot afford to limp around after a stock market correction because of the confinement of products to a single mindset of correlated investments in one area of investing.

Background

Crowdfunding (CF), like Peer-to-Peer lending (P2P), is a method to raise funds or capital for various projects, like start-up businesses or real estate investments. CF uses the Internet and software platforms to appeal to a broad audience (The Crowd) for project funding (Langley, & Leyshon, 2017). Instead of relying on traditional bank funding or convincing business angels or venture capital (VC) funds on the new enterprise's merit, the entrepreneurs present their ideas to the global public (Lehner, Grabmann, & Ennsgraber, 2015). Crowdfunding comes in two flavors, reward-based CF and equity-based CF. Reward-based CF can represent a philanthropically based project or entry capital for a new business venture. In either case, reward-based CF does not necessarily involve repayment of capital. However, some tokens of appreciation are sometimes prearranged to the donor--such as tickets to a sporting event or advanced copies of the new video game they initially financed. On the other hand, equity-based CF typically involves surrendering a percentage of ownership in the new company.

P2P lending is a private lending platform in which a repayment plan is expected. P2P lending is the next innovation of technology currently transforming private lending into a viable alternative investment model for retail and accredited investors. Many peer-to-peer lending sites are popping up on the Internet. Some of these sites appeal mainly to retail investors who invest small amounts of money eager to increase yields absent with typical bank products. However, a few of the online peer lending sites are strictly for accredited investors. (Accredited investor is currently a restriction for individuals who earn more than $200,000 per year or have over 1 million in assets—not including their home) Keh-Wen Songtao, Kuan-Chou, and Chen (2016) express some concerns about lending practice without collateral. Also, the authors find many of the borrowers would not qualify for traditional bank financing. Of course, this lackadaisical lending practice allows the lending sites to garner higher interest rates for their investors, albeit with much higher risks. Unfortunately, some of the more quality peer lending sites are strictly for accredited investors. Many of these quality sites lend money backed by real estate or business machinery as collateral and use traditional credit standards.

References

Keh-Wen "Carin," C., Songtao, M., Kuan-Chou, C., & Chen, Y. (2016). The evolving role of peer-to-peer lending: A new financing alternative. Journal of The International Academy For Case Studies, 22(3), 32-38. Retrieved from https://www.abacademies.org/journals/journal-of-the-international-academy-for-case-studies-home.html

Langley, P., & Leyshon, A. (2017). Capitalizing on the crowd: The monetary and financial ecologies of crowdfunding. Environment & Planning A, 49(5), 1019-1039. doi:10.1177/0308518X16687556

Lehner, O. M., Grabmann, E., & Ennsgraber, C. (2015). Entrepreneurial implications of crowdfunding as alternative funding source for innovations. Venture Capital, 17(1/2), 171-189. doi:10.1080/13691066.2015.1037132

Investment and advisory services are offered through Herrington Financial Services, Inc., a Registered Investment Advisory (RIA) firm. This article's information does not constitute an offer to sell securities or a solicitation of an offer to buy securities. This article is for educational purposes only. All information in this article is the expressed opinion of the author and not Herrington Financial Services.

Investment and advisory services offered through Herrington Financial Services, Inc., a Registered Investment Advisory (RIA) firm. The information on this website does not constitute an offer to sell securities or a solicitation of an offer to buy securities. This site is for educational purposes only.