Earn More Than 0% On Your Cash

In today’s low-interest rate environment, most bank accounts earn a return between 0% and 0.25%. This site discusses investment opportunities that can provide higher rates of return for your excess cash. I believe that the majority of your portfolio should still be in traditional investments, i.e. stocks and bonds. However, there are several options for retail investors to earn higher returns than those currently available from deposit accounts.

I don’t recommend every investment type that I write about. My general preferences are:

1. The investment should be relatively liquid, with a time frame of 1-3 years

2. There should be relatively low setup costs and transaction fees

The top menu has the general investment categories that are discussed on the site.


Prosper.com Review For Investors

I signed with Prosper.com as an investor about six months ago and deposited $2,500. So far I’ve been happy with the site. This is my review of Prosper along with a discussion of how it works.

How Does Prosper Work?

Prosper is a peer-to-peer lending site. That means that individual borrowers apply for loans, which then get funded by other individuals. (Most of funding actually comes from institutions now). Borrowers get loans of $5,000 – $35,000 at rates of between 10 and 20 percent, depending on their credit history. All of the loans are fully amortizing and have either 3 year or 5 year terms.

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ETF Investing

An ETF investing strategy is not one of the high-yield strategies that are the focus of this site. Rather, it’s a way to invest the main part of your portfolio that is comprised of stocks and bonds. In my opinion, allocating between a few low-cost ETFs is the best investing option for nearly every individual investor. This applies to both smaller investors and high-net worth individuals. The data shows that a simple portfolio comprised of 2-4 ETFs has historically outperformed many actively managed strategies. Although outperformance cannot be guaranteed in the future, I can guarantee that if you follow an ETF investing strategy, you will pay low fees.

Here are a few model portfolios comprised of ETFs.

1) 60% U.S. stocks/ 40% bonds

A portfolio comprised of 60% stocks and 40% bonds is a classic and simple allocation. Other investing strategies are frequently compared to the 60/40 portfolio, which serves as a benchmark. You can get this portfolio by buying just two ETFs: a S&P500 index fund and an aggregate bond index fund. If you choose an S&P500 index fund, you are allocating almost entirely to large-cap companies based in the U.S. (although many companies receive revenue from international markets).

2) 80% U.S. stocks/20% bonds

3) 60% U.S. stocks/20% foreign large cap stocks/20% bonds

4) 60% U.S. stocks/10% foreign large cap/10% foreign developing/ 20% bonds

Dividend Growth Investing

Dividend growth investing has always been popular with a wide range of investors, but its popularity has greatly increased since the financial crisis. The main idea of DGI is to buy the stocks of companies that have paid steady and increasing dividends for a period of years, usually at least 10 or more. These are usually large cap companies that are stalwarts of American business; frequently they sell consumer staples that are necessary regardless of economic conditions.

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Liquid Alternatives

Liquid alternatives or “liquid alts” are funds that are not constrained by traditional asset allocation rules. A traditional fund takes long-only positions in a basket of common stocks or bonds. Liquid alts, on the other hand, may take long or short positions in stocks or bonds, options, derivatives, commodities, and other asset types. They can follow different trading strategies such as event-driven, quantitative, technical/momentum-driven, or low-volatility. Thus, they provide smaller investors with a way to gain exposure to these strategies, which were previously only available to institutions.

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Peer To Peer Lending

Peer-to-peer lending originally meant a way for individual lenders to fund loans for individual borrowers. The two most well-known sites in the U.S. are Prosper and Lending Club. In the early years of these sites, most of the loans were truly funded by individuals. However, the industry has now evolved to a point that most of the loans get funded by large, well-capitalized financial institutions. The new term for the the industry is “marketplace lending”.

Marketplace lending provides benefits for both the borrower and the investor. The majority of borrowers are using the loans for “debt consolidation”, which probably means they are paying off credit cards with very high interest rates. The rates that borrowers get from Prosper or Lending Club are not cheap – they are typically between 10 and 20 percent APR. However, they are considerably cheaper than credit cards that charge north of 20% APR.

It should be noted that the industry is relatively new. The large marketplace lending sites began operations after the credit crisis of 2008-2009. Thus, the industry has existed only during the past six years, in which the economy was recovering and interest rates were extremely low. As a whole, marketplace lending has not been tested by negative economic conditions.

So far I’ve written a review of my experience as a lender on Prosper.com, which can be found here.

Private Real Estate Investing

Investing in real estate for the purpose of income appeals to a wide range of investors. There are a number of ways to do this:

1. Purchase the shares of a publicly traded REIT ETF: This is the easiest way to get exposure to real estate as an asset class. For example, the SPDR REIT ETF (RWR) tracks an index of 92 large REITs. The current yield on RWR is just over 3%.

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