Passive Investment in Index Funds and Peer Lending

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Finding a sound place to invest in this tumultuous and unpredictable market is tough.

Other than investing in yourself, there are only two vehicles I recommend to people at this time.

Index funds and peer lending.

Passive Investment

Passive investment in index funds

Index funds follow the trend of the index they’re a part of. An S&P 500 index fund follows the curve of that index. If it’s a NASDAQ index, it follows the pitch of the NASDAQ curve, etc.

If you are a savvy investor you don’t need my help, but if you’re like me – someone who doesn’t want to spend all day tracking investments – you’re probably looking for a hands off approach that pays solid returns.

I have two recommendations for investing in index funds.

1. Target retirement funds: Open an account with VanGuard (or your favorite brokerage firm), find your Target Fund based on your age and target retirement date, and invest in that fund.

2. Betterment: Open an account with Betterment and let them diversify between the best index funds and bonds for you, based on your risk assessment; it’s very hands off. (Betterment fees were recently slashed; read my full Betterment review for more info.)

My research and experience establishes these two options as the best, most passive investment strategies that yield solid returns.

Passive investment in peer lending

Peer lending connects individuals looking to borrow with those looking to invest.

It’s that simple, and is basically an alternative to borrowing from banks that allows individuals to invest in, and help, other individuals.

There are two main peer lending platforms I recommend: Lending Club and Prosper.

As an example: Bill carries a balance on four different credit cards totaling $15,000. Cindy has money to invest, is wary of the market, and likes to help people get out of debt. Peer lending connects them and provides a platform to borrow and loan money between individuals. Cindy signs up as a Lending Club investor and Bill signs up as a borrower. Bill lists his request for a loan and Cindy invests as much as she wants in his loan (along with many other investors). Once the funding is complete, Lending club sends Bill a check (or direct deposit) which Bill uses to pay off his cards. Bill then makes one monthly payment (principal and interest) to Lending Club who then applies it, in micro-payments, to each investor, every month.

It’s not totally passive because you have to choose the notes (loans) you want to invest in, but you get to invest without trying to predict how a tumultuous market will move.

It’s hands on in that you get to help fund things you believe in, but hands off enough so you don’t have to understand markets and make stock picks – you just have to pick borrowers you want to help, who have the ability to pay the money back. The peer lending platforms give you all their personal financial information so you can make an educated decision.

I have been both a peer lending borrower and investor using Lending Club.

I have been investing in peer loans through Lending Club for over two years now. To date my peer lending returns (NAR – Net Annualized Return) stand at 9.33%, which is really good compared to many investors stock market returns over the last few years.

Invest where you’re comfortable

If you’re unsure about an investment, don’t get involved.

If you don’t understand peer lending or index funds but want to invest, study them out – then make your decision.

Read more about Betterment. Read more about Vanguard Target Funds. Read more about Lending Club. Read more about Prosper.

Educate yourself and pick a passive investment strategy you’re comfortable with.

I recommend doing both index fund and peer lending investing – it’s what I do.

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photo credit: photologue_np



Betterment is one of my two favorite ways to earn interest on my savings! They have an awesome program for the Average Joe to save and invest simply and effectively. There are no minimum balance requirements and no transaction fees. Read my Betterment Review or open an account to get started earning now.

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