Recently, some people asked us about crowdlending. We’ve heard some of these questions before. That makes sense to us, as it’s one of the fastest-growing alternative investments globally. Nevertheless, crowdlending is still in its infancy. There are a lot of unknowns, and the information available is sometimes murky at best. We decided to dive deeper into the subject over a few blog posts. In part one, we covered the basics of this investment class. In part two, we examined some of the most significant crowdlending risks. Here, we’re going over crowdlending tips for people living abroad.
Where does it fit into a portfolio?
Crowdlending has great diversification benefits for a portfolio. Unfortunately, there’s a lot of bullshit advice floating around the internet about how to use it properly. While you should make your own investment decisions (or speak with experts who can help you), it’s worth understanding crowdlending’s place in a portfolio.
Like any other investment, there are some rules to follow when investing in crowdlending. First, it’s imperative to spread your investments out. In other words, don’t put all of your money into crowdlending platforms. If the lending market goes belly-up, your investment portfolio is going with it. Unless you’re willing to roll the dice on your entire nest egg, you’re going to want to limit your overall exposure.
A lot of popular investment strategies incorporate emerging market stock funds into their portfolios. From a diversification perspective, that’s a universally recommended move. Depending on your risk tolerance, you could swap an emerging market fund for a collection of crowdfunded loans targeting similar regions. In that sense, the diversification benefit could be even better than with a fund as there is a low correlation between stocks and loans. The balance you use will depend on your own needs and preferences. If you’re uncomfortable doing that yourself, we recommend contacting an investment adviser.
Finally, if you need your cash more immediately — say less than three years from now — you’ll want to avoid parking it in a crowdlending platform. The conventional wisdom states that if you need your money less than five years from now, don’t invest in stocks or equity funds. That’s excellent advice. However, crowdlending has risk levels similar to the most volatile stock funds (if not more so). Therefore, it makes zero sense to park your short-term cash there. This rule is doubly true if you need that money for a known upcoming expense, like a home purchase. Shocking more than a few forums and platforms are advocating otherwise, and it makes zero sense.
In brief, you’re more than likely better off limiting your Crowdlending investments to a small amount of your portfolio. When you do, make sure it’s with money you can afford losing in the short run.
Crowdlending tips for people abroad
As an expat or digital nomad, your investment needs are unique. Like other investors, diversification is key. As a global citizen, though, you’ll need to be aware of a few points.
For one, if you’re moving countries often, your taxes could change each year. Since each jurisdiction taxes investment income differently, your bill could either increase or decrease. We can’t speak for every country (at least not in a blog post), but generally in Europe, countries tax interest income at different rates than stocks and investment funds.
Depending on how many investments you make, your tax bill could quickly accumulate. Many platforms offer an automatic reinvestment service, which will take the interest you earn and put it into new loans. It’s a useful feature. However, each time you get an interest payment, you might owe tax, even if the platform reinvests it automatically.
There’s not an easy way around this liability. Just keep in mind that you’ll need to budget some time and energy to manage your taxes. Your best bet is to work with an accountant who knows the local tax code.
Second, the currency markets can adversely impact your crowdlending portfolio. If you invest in, say, British Pounds to a lender in Georgia borrowing Euros, you have a triple exposure to the currency markets.
First, you have to anticipate changes between the pound and the euro. Next, the borrower in Georgia will have to repay her loan in euro. Nevertheless, she makes her money in Georgian lari. If the lari falls versus the euro, then the risk that she cannot pay it back increases. Finally, even if she does make good on the payments, the pound could strengthen versus the euro, further complicating your investment.
Even though everyone faces currency risk, digital nomads, and expats with multiple currency earnings are particularly susceptible. These people should be aware that certain forms of crowdlending come with added risks.
ESG and Crowdlending
Third, many of us living abroad see first-hand the downsides to the global world. We witness climate change in different climates. We understand and empathize with other cultures because, well, that’s what we do every day. While one of crowdlending’s goals is to make the financial world more inclusive, sometimes, that mission goes unchecked.
For example, micro-lending to people in underdeveloped and developing markets provides struggling people with otherwise inaccessible loans. Sadly, what was once a good intention has taken a turn for the worse. Many micro-lending companies use predatory tactics to lure poor people into debt traps. The loans on offer come with exorbitant interest rates, well north of 100% a year.
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As it would happen, the micro-loans can get packaged and resold into crowdlending platforms. If you’re uncomfortable with this practice, then you should do more research about the platform and loans on offer.
Finally, you want to make sure that the platform you use is registered with a local regulatory body. This authority should be in a country with an efficient legal system and transparent investor protection. Even though it represents a small part of your portfolio, you’ll still want to have some legal recourse, should things go screwy.
As we mentioned in our previous post, there are no uniform rules for crowdlending in the EU. Instead, each country creates its guidelines. Baltic countries such as Estonia and Latvia are typical locales for a lot of crowdlending companies. These states are popular thanks to their relatively weak regulations and EU membership.
If you’re in any doubt about a local crowdlending platform, check on the government regulator’s website (here’s what the one for Spain looks like).
Crowdlending is here to stay. Despite its unique risks, there are known investment opportunities available. Still, it should be only one of many different tools used for growing our wealth. For all investors (including those living abroad), it’s necessary to understand not only the risks but where crowdlending sits in a well-diversified portfolio. Once we do, then we can fully utilize crowdlending to our advantage.
Abroaden is a company for expats, digital nomads and other world citizens looking for low-cost and transparent financial advice and investment management.
*Note that this article is for information and educational purposes only. It does not constitute financial advice.