September 5, 2018 (2 weeks ago)

How do returns in short-term loans for SMEs compare to mainstream investments

Investors will always seek how to deploy their money and diversify them, considering risk, expected return, and available capital. Financial and investment analysts monitor various funds, indices and other investment options to figure out which investment portfolios earn the highest average throughout the years.

Investors, business people, and those, that amass considerable wealth state that they achieved it not by saving, but by investing. It is a well-confirmed fact, that saving, actually, will cause you to lose money. As annual inflation (in the World) is around 4% and keeping money in commercial bank (at least in Europe) would not earn, but cost you money due to low interest rates, letting your money sit in a bank, or at home in the form of cash.

This is by no means to say, that one should not save. On the contrary, we do know that overspending and excessive borrowing leads to severe economic problems on both personal and national levels. On the other hand, capital kept in a bank or in cash will lose value as time goes by.

Long-term conservative investments

Long-term investors that are more interested in a more conservative and secure way to invest, such as bonds or value stocks would be looking for a reliable mutual fund or a stock index, preferably, SP500 to open a long-term position. It is natural, that these types of investments do not usually give one high returns.

Just for the sake of comparison, we may look at what one would have averaged annually if he/she invested in SP500 index, an average mutual fund or an average hedge fund.

SP500 – 7.952%

Mutual funds – 4.67%

Hedge funds – 2.2%

As we may see, investing in the stock index of most popular US stocks would have given you the best annual return. The percentages differ very little if you take into account 10, 20 or 30-year performances. The data for hedge funds encompasses 9-year period, which means that overall return over 9 years investing in hedge funds would have averaged you 2.2 percent annually (or 22 percent in 9 years). The Omaha legend Warren Buffet placed a bet of $ 1 million that it was not possible to put up a portfolio of hedge funds that would outperform SP500 Index fund over a 10-year period.  Looking at the above given numbers, it seems obvious that Warren Buffet is going to win the bet.

Aggressive and high risk/reward-based investments

Of course, if you are an insightful stock picker that may spot a growth stock which is about to soar, these percentages may not attract your attention, and you would probably be more interested in big risk/reward ratio assets. However, these require excellent analytical skills and a strong stomach to see stock soaring (making you huge profits) and then collapsing (watching those profits dwindle).

A lot of risk traders wait for strong market trends to develop and use high leverage to trade various financial instruments: stocks, commodities, currencies or other securities that offer very attractive returns with extra increased risks. When the market goes against them, they often have to cut their losses and do it fast as these savvy traders typically have a specific pre-set percentage loss of their equity when they close all open positions.

These investors also look for IPOs, Startups or ICOs that would generate them hundreds, possibly thousands percentage return on the investment. As you may know, statistics show that around fifty percent of those fail within the first year and most of the rest do not generate enough profits. Just about 1-2 percent of the companies may give back the investor huge returns.

The golden middle –average risk/reward returns in short term loans

There is a middle path – alternative finance and investing in short-term loans. This is quite attractive and moderately risk-averse type of investment. Investments in these are short-term, typically last from a few weeks to a half year. However, an investor can reinvest his money and interest earned by choosing various assets with different maturity periods. Debitum Network platform Abra 1.0 has just launched and investors can invest on an average annual interest rate of 10-15%.

Conclusion

As one may see, there are plenty of opportunities for various types of investors in the current financial system. It does not matter, whether you are more risk averse, risk investor or fall somewhere in between. Taking aside financial markets, we want to draw your attention to the rising market of alternative lending for small businesses, that may not be the most attractive type investment out there, but still, one that delivers better returns than most popular and largely advertised means of investment.

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