By Nicholas Bryan
A question among most investors today is, “How can I better diversify my portfolio for yield while focusing on capital preservation?” Most money managers will suggest bonds; traditionally, bonds have been a great source for yield because they have a lower risk of default. However, bonds are not as attractive to investors today as they once were since yields are extremely low in the U.S. According to Aberdeen Standard, a traditional balanced investment portfolio of equities and fixed income would be forecasted to deliver a return of around 3% versus an average of 7% over the last 20 years. The simple answer of the question above of how to diversify a portfolio is to get innovative.
Private Loans Offer Great Investment Options
One of the most innovative new options for investors seeking fixed cash flow is private loans is through equity-based crowdfunding. Crowdfunding gives investors a way to earn a higher return on their investment than traditional bonds while maintaining a similar to lower level of risk. Bond prices are determined by factors such as risk premiums related to credit quality, inflation, and interest rates, whereas private loans can provide steady returns by providing exposure to additional risk premiums. The additional risk premiums from private loans come from illiquidity, manager skills in less efficient markets, and the potential decline in bank lending. Although, these investments are highly illiquid, the return premium received for this illiquidity can be significantly higher compared to even “junk” bonds, typically around 8% to 12%. These returns top even the riskiest bonds which yield a three year low of around 6%.
Private loans also offer a broad array of investment options, from agriculture to real estate. The returns produced from private loans come from the cash generated from the underlying assets purchased through the private loan. These assets are cash generating so the revenue created is attributed directly to the ownership of the asset. Investments in private loans are not affected by factors like the stock market because the asset is independent and generates revenue through production. Another advantage of investing in private loans via crowd-funding is the lower minimums. Many corporate bonds can be purchased individually in $100,000 increments (or more), whereas risk can be spread over a number of private loans with much lower minimum investments using that same $100,000 via crowdfunding.
In today's dynamic climate, investors need to get creative and find new ways to diversify their portfolios. With bond yields so low, investors should look into fixed income assets and private loans through equity-based crowdfunding. They provide a premium that is higher than today's bonds offer and can be considered safer than some bonds.