It doesn’t matter how good a deal you’ve found or how cool an investment opportunity seems. If you don’t understand how it works, steer clear. You probably have at least one friend who is always rushing from one “perfect investment opportunity” to the next. Unless you can afford to burn money in a barrel (which you shouldn’t), steer clear of investments that you don’t fully understand. – Warren BuffetTrying to identify the right investments to make is where things typically get tricky. However, I have learned to take a step back from trading stocks without supervision :). It hasn’t gone terribly well for me just yet. I have had some wins and misses but nothing I could brag about. What I have stumbled upon is Peer to Peer investing which is something I can understand much better than the stock market. I decided to give it a try and picked LendingClub.com as the platform to experiment on with limited sums – not wanting to take too much of a plunge. I have been at it now for almost a year and so far so good. The concept is one we are all familiar with. Someone needs money for a purpose, you loan them the money with interest. So you serve a similar role as the bank would. The website platform you go through is the middleman that facilitates the transaction and services your loan for a fee. It uses some characteristics from the borrower’s application to rate the potential risk level the borrower presents and then charges them an interest accordingly. Lower risk borrowers get a lower interest and higher risk borrowers pay more interest for their loan. Multiple Lenders (such as myself) can contribute toward funding one loan. A Lender’s principal and interest will be paid back in proportion to their investment made. As with any investment, there are potential risks involved. Borrowers could default on the loan. I have been fortunate so far to not have any of my borrowers default but there is no telling if there will be defaults down the road before the loans in my portfolio mature. I have however had some borrowers pay off their loan much earlier than I anticipated although I still made a decent interest (5-10%) on my investment, and reinvested the funds in other loans. While loaning money to individuals for a fee is not new, doing so through the platforms on the web that have been created to facilitate these kinds of transactions at an individual versus institutional level are fairly new and will go through a natural evolution as this new domain matures. However, as much as I understand the basics of lending money for interest much better than the stock market and its many complex investment instruments, I haven’t given up on the stock market altogether. For that, I am settling for Index funds and dollar cost averaging. Maybe someday I too will join the ranks of the sophisticated savvy investor. In the meantime, I plan not to ignore some reasonable advice from Warren Buffett who has simplified an overly complicated set up for novices such as myself. Besides, who else should I take advice from other than the richest Investor in the United States?
Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers. – Warren Buffet