One of my previous posts was about how any investing can be socially responsible, provided that it’s a means to an end: one no longer needs paid employment and can choose from a variety of unpaid socially responsible activities such as volunteering or tutoring.
I sort of feel like that’s a cop-out answer, so let’s look at one area of investing that I think is very socially responsible: Peer-to-Peer Lending, or lending money to others, without traditional financial institutions (i.e. banks) acting as middleman.
I’ve had, and currently have, P2P investments in a few different organizations. I’ll explain the pros and cons of each:
The first one is Microplace. It’s very similar to the more-popular Kiva, where your money is loaned to small businesses in developing nations. The main difference is that investments at Microplace earn interest, currently around 1%. That’s about the same rate you’ll get from a CD so it’s not going to let you retire or even keep pace with inflation. However, it can be a small part of a well-diversified portfolio since it’s probably not tightly correlated with investments in the US stock market*.
Furthermore, I’d argue that money otherwise earmarked for charitable giving in one’s budget could instead be invested here. Since the money invested at Microplace earns interest, it will begin to compound, enabling you to invest more and more, increasing your ability to do good in the world.
The other P2P institution I have experience with is called LendingClub**. It’s a similar to Microplace, though the borrowers are here in the USA. They’re frequently looking to do debt consolidation, or for starting money for a business. Since the loan amounts are typically in the $10k – $20k range, investors pool together their money in $25 chunks to fund a loan. That way, a single investor can buy dozens of loans to ensure that if one loan defaults, you don’t lose all your money.
Borrowers get lower rates than they’d otherwise get from banks, which has two benefits: immediately, the borrower can free him/herself from the high rates charged by banks and credit card companies. And in the long run, this will cause competition among lenders which will lower rates for everyone.
LendingClub is a powerful but dangerous tool in the investing portfolio. The company brags about returns in the 10 – 14% range, which of course is unheard of in the stock and bond markets. But no return of that level is without risks. I’ve had one loan default on me so far, which is money down the drain. Even so, my average rate of return with LendingClub is over 9%. I don’t ever plan on having more than 2% of my total investment money in a risky product like P2P lending.
Before you put any money into LendingClub, you should research the complex filtering tools and develop an investment strategy. Since I’m lazy, I copied the strategies of folks who have demonstrated success tweaking and scientifically re-checking their own returns. For example, here’s one from a blogger named Brave New Life.
Anyone else have investments they feel are socially responsible?
* In other words, means ups and downs in the domestic stock market probably have little impact on the ability of Microplace loan recipients to repay their loans.
** The link to LendingClub is referral link, that gives you $100 for signing up and making an investment. I don’t get anything.