I did some analysis a few days ago on how my investments are spread and if they’re diversified enough. The way I see it, all my investment portfolio could be split into items belonging to 8 different levels of risk. From low to high, the level of risk and volatility is directly linked to the potential gains available on each layer. Without further ado, here they are.
Bank deposits and savings account
This is the most solid layer in my finances. Nothing that could happen would make that money disappear. If the bank goes bankrupt, my funds up to 100.000 EUR are guaranteed by a fund specially created for this.
Of course, the interest rates are low. So low, that I actually lose money each moment I keep them in there because the rate is a lot lower than inflation.
I keep my emergency funds here, enough to cover my livings costs for around 6 months. I could stretch them to be enough for 1 year if I really needed to.
Government bonds should be a safe investment as long as that government’s country doesn’t declare bankruptcy. Or as long as it doesn’t decide to devalue its currency in order to reduce its debt.
They also have low-interest rates, a bit higher than bank deposits though. I own government bonds through an ETF on Degiro (I wrote a review about Degiro here if you’re interested to learn more about it). The ETF has a mix of 3 to 5 years US government bonds in its portfolio and I get monthly dividends that amount to a bit less than 3% per year. Adding the taxes on the dividends, I could say the dividends cover the inflation rate. So, I don’t lose money on these government bonds, but I don’t really win any either.
I’m keeping them in my portfolio as a safety net. For that special moment when the market is down, and I would need some quick funds to buy cheap stocks at 80% discount.
I also own some corporate bonds through a platform named WiseAlpha. WiseAlpha buys corporate bonds from big UK companies and then breaks them in small parts (participation notes) and lets small investors like me buy them. The interest rates are decent, around 5-6%, nothing to brag about. I won’t get into too many details on WiseAlpha, you can read about them on this post.
My current plan is to add a bit more funds to this layer, to around 10% of my total portfolio. I’m halfway there right now. This weird saying got into my head recently, that the percentage of bonds in your portfolio should be equal to your age. Since I’m 30+ now, 30% of my portfolio should be in bonds. I’m not going to get that high, but I sure can put a bit more effort into it.
Recently I started to add gold to my portfolio. This, along with the previous two, is also a defensive layer. The volatility of gold is really low, so I shouldn’t expect surprises from one day to the next.
I don’t actually own gold bullion, or gold jewellery or whatever. I’m using this platform, GlintPay, that’s promoting the use of gold as a day to day currency. It gives you a debit card that you can use to top up with GBP (and at some point in the future EUR) and convert it to gold. Then you can use the card for payments (it’s Mastercard, you can use it for everything). When you pay, it will convert automatically your gold back int GBP and pay with that, so you’re not really paying with gold, but sort of.
The gold does exist, in some vaults in Switzerland and some other country (I forgot). In case GlintPay goes bankrupt, your gold will still be there, except it will take a while until you can get it.
I’m not using the card for payments. I’m simply hoarding gold on that account and wait for it to grow, slowly, painfully slow. The gold price has gone down for the last I don’t know how many years, so I’m hoping this is the bottom and it doesn’t have any more place to fall.
Of course, I should invest a bit more time for studying the market: current and past production, global gold reserves, political stability in countries with large gold reserves, what country’s central bank is buying gold and so on. I might do this in the near future and decide then if it’s worth to fatten my gold reserves or not.
One thing I like about GlintPay is that I don’t pay an annual fee because it keeps my gold safe. Banks do this, or they let you take your gold nuggets home but might not accept them when you want to sell them back because you might have tampered with their quality.
Stocks are a big chunk of my portfolio. Electronics, technology, payments, cars, shoes, clothes and ketchup. This sums up all my stock investments in the last couple of years. These are domains I know something about, so I try to capitalize that knowledge by investing in companies I like, and I believe in.
I’m using Degiro (I wrote a review about them here), eToro and xtb for my stock portfolio. I’ve started with xtb and eToro, then looked for a better alternative to them and found Degiro. Now I’m slowly transferring my portfolio from the former two to Degiro.
Degiro has low fees (~1 USD per trade) and no inactivity fee or monthly fee or whatever. I’ve also been interested in Interactive Brokers. They also have 1 USD fees when trading US stocks, which is good. But they also charge you 10 USD per month if you don’t do any trade. Since I’m not sure I would do at least 10 trades per month to cover that fee, I don’t think it’s worth to move there for now. So, I try to ignore the ugly interface of Degiro and the 15 minutes delayed stock prices and stick to it.
Crowdfunding is a newer interest that I acquired in the last year. With real estate crowdfunding, or crowd investing, you buy parts of a property or of a real estate development project and then gain profits from rent or the sale of the property.
I don’t have 500.000 EUR or expertise on how to build an apartment building. But if this company says they’re building this apartments block and they’re looking for financing and they’re paying me 20-30% more than I give them after they sell the apartments, how could I refuse them? It’s a good deal for both.
I don’t have enough capital to buy an apartment and rent it, so I can receive monthly payments from rent. And even if I had, I’m not sure I’d like to chase tenants for the rent every month. But if this company says it’s buying apartments to rent them and it’s looking at me for financing? And for my investment, they would give me a share of the apartment they buy? And I would receive a part of the rent each month? How could I say no to that?
So, this would be my reason for investing in companies that use crowdfunded capital to buy apartments in London, Paris, Lisbon, Barcelona.
The per cent of my portfolio that is put into real estate crowdfunding is low enough that I won’t be hurt too much if the market falls again as it did 10 years ago.
I’m mostly using Property Partner and Crowdestate, and sometimes EstateGuru, for these types of investments. I wrote a review about them here, here and here if you want to find out more about them. They promise annual returns in the range of 5% to 20% and I’m waiting to see if they deliver.
Peer to peer lending
Peer to peer lending is my next risk level of investment. A bit riskier than real estate crowdfunding, but with better returns.
In its most pure sense, p2p lending means you, as an individual, lend money to other individuals, for a period of time with an interest rate. The platforms I use work a bit differently.
Some would lend money themselves and let you buy smaller shares of the loan for an interest rate.
Others would allow third-party lending companies to publish their loans on the platform and let you buy shares of those loans for an interest rate. Kind of the same thing, with and without a middleman. Of course, the interest rate you’re offered is smaller than the one the borrower pays to the lending company. This way you both take a cut of the profit.
The loan types come in all sorts of colours: short-term (payday loans, I stay away from those as I consider them unethical and detrimental to society), business loans, travel, agricultural, etc. Different individuals or businesses might need capital for a shorter or longer-term at some point. Getting a loan from these lending companies is faster and easier than getting one from a bank.
I’ve started with Mintos (I wrote about them here) and then added Twino, Bondora, Grupeer and recently Neofinance. The links point to some articles I wrote about them. The returns are in the 10-15% range. Even more, some of them have a buyback policy. This means the platform buys the loan back from you if the borrower is late with their payments. Some of them even pay you the interest payment you missed because the borrower was late or defaulted the loan. So, it’s not that bad of a deal.
I’m using Crowdcube and Seedrs to invest in European startups that either already have a product or they are in the idea phase. The companies I invest in create things that I like, and I believe in. Most of them, at least. Some of them, I hope not all of them, will fail and I won’t see any return from my investments. But maybe a few will become the next Revolut, or Airbnb or Spotify. And I’ll get back a lot more capital than I put in.
I don’t get a t-shirt or whatever as I would get if I would fund a project on Kickstarter. I get equity in a company based on their valuation at funding time. And I’ll hold on to it until I get an opportunity to sell that equity, hopefully for a profit.
I’d be able to sell them when the company gets publicly listed. Of if the company wants to buy back shares from the market to increase their equity. Or if the company is bought by a competitor, along with my shares.
My investments in these startups range from 50 GBP to 150 GBP, token amounts, to be honest. So, nothing big lost or gained. It’s mostly for the thrill and excitement for something new that has the potential to be great. And maybe later I can use my experience gained here for something more serious.
Last year I got sucked into the crypto hype a bit and now I own some crypto. I owned a plethora of shitcoins in the beginning. Now I’ve cut back just to 3 of them: BTC, XRP, ETH. Nevertheless, my crypto portfolio is 60-70% lower than what it was last year by this time. And it’s not because I sold any of it, but apparently, I’m a hodler.
I wouldn’t say cryptocurrencies are an actual investment because for me it’s just speculation. If their prices fall to zero, I hope I can cover my losses with the gains from my other investments. If they skyrocket, I do want to have a seat at the table. There’s a specific term for that, I know, it’s fear of missing out. And it got the better of me.
I’ve put these layers in increasing order of risk levels. The first levels, with deposits, bonds and gold, are the safest, with the lowest volatility and lowest potential gains.
Stocks and real estate crowd investing, I’d put them under the same risk umbrella. I mean, on the stock market you can also invest in REITs (real estate investment trusts). These are the grandparents of real estate crowd investing platforms.
Peer to peer lending, I’d put this in a separate risk level. Higher than stocks and real estate, but not even close to the unknown represented by startups and crypto.
Crowd investing in startups, and hodling cryptocurrency, have the highest risk level, but also bring the biggest potential for high wins.
So I could group my initial 8 levels of risk further and leave only these 4 levels. Anyway, let me know what you think about this.