Stock and Bond Replacements

Stock (Equity) and Bond (Debt) Replacements

           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 which are viable replacement vehicles (Alternatives) such as 

Crowdfunding (CF) and Peer-to-Peer lending (P2P).  The DNA of an investment portfolio 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 wide 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 merit of the new enterprise, 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, although 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 which a repayment plan is expected.  P2P lending is 

the next innovation of technology which is currently transforming the private lending practice into a 

viable alternative investment model for retail and accredited investors.  There are many peer-to-peer 

lending sites popping up on the Internet.  Some of these sites appeal mainly to retail investors where 

they can invest small amounts of money in hopes of increased yields not found 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 personal home)  Keh-Wen Songtao, 

Kuan-Chou, and Chen, (2016) express some concern related to the practice of lending without 

requiring 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.

As always—let me know if I can help. 

Gerald House

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