Savvy investors know that how you allocate your assets is just as important as diversifying your portfolio for long-term gains. But where do you go when the stock market is unpredictable? High volatility can leave you with a feeling of unease if not outright fear.
The key is to allocate your assets in such a way that a downturn in one class doesn’t eat away all your gains. There is no perfect way to predict how asset classes will perform at any given time, so the best way to protect your investments is to spread them around, and marketplace lending can help with that.
What is an Asset Class?
Investment experts differ in how they define the asset classes. Investopedia recognizes three distinct asset classes. Nerdwallet, on the other hand, identifies four asset classes. Some investment analysts will add other asset class definitions to the list or classify certain classes as subcategories of these four. The important thing to remember is that these asset classes serve as a useful tool for keeping your money secure. Because investment vehicles in the same asset class tend to act similarly in most economic conditions, you can hedge them against each other for asset protection.
The basic asset classes are:
- Equity
- Debt
- Cash and cash equivalents
- Real estate and commodities
By keeping some of your money in each asset class, you stand a better chance of realizing long-term gains and protecting your money in bad economic times. But within the last decade, a new asset class has emerged. It’s called marketplace lending.
How Marketplace Lending is its Own Asset Class
The average investor doesn’t have access to real estate because it ties up a lot of money over an indefinite period of time. But what if you could own a stake in real estate like you own a stake in a business? If you could share ownership with other investors, you’d lower your risk and have greater access to an asset class that may be out of your reach otherwise.
If you could do that, would your money then be in an equity investment or a real estate investment?
Since marketplace lending investments possess some of the characteristics of equities and some of the characteristics of real estate, you could say it belongs in a class of its own. If structured the right way, it can also possess the characteristics of the debt asset class. If a pool of investors, for instance, lends money to a sponsor for the purpose of rehabilitating or improving a property and realize a return on their investment in the form of dividends as interest on a loan, then you are actually investing in a debt instrument with real estate properties.
For these reasons, MPL should be considered its own asset class. Instead of moving your money away from other asset classes, you can keep your other investments secure by adding MPL to your portfolio. Another way of doing that is to transfer a small percentage of money in each of your other asset classes into the MPL asset class. In other words, spread it around and protect it all.
