The Reserve Bank of Australia has made history again, cutting interest rates to a historic 0.5 per cent after weeks of market turmoil in the wake of coronavirus. In 2019, the RBA made three rate cuts in June, July and October.
Some commentators are predicting another 0.25 percentage point cut in April. That would bring the cash rate down to 0.25 per cent, which means investments like bank deposits will likely trail the inflation rate by 1.75 percentage points.
The low-interest rate world provides a clear impetus for investors to explore alternative methods for growing their wealth. A February 2020 survey conducted by RateSetter of over 1100 retail investors from their platform showed 74 per cent of respondents confirming low rates will impact how much cash they keep in the bank.
In this low rate environment, once the effects of inflation and taxation are considered, the value of your wealth may even go backwards.
Investors should be asking themselves: how do I keep my investments performing?
In this regard, fixed income investments are an attractive option for investors looking for a steady income stream and seeking to stay ahead of the curve during low-rate environment.
The peer-to-peer investing opportunity
Peer-to-peer (P2P) lending businesses, such as RateSetter, allow retail investors to tap into this attractive asset class (consumer credit)at a time when other fixed income assets deliver lower than historic income/yield.
RateSetter’s research showed for retirees, diversification was the top motivator for new investments in 2019 (25 per cent), followed by low-interest rates (21 per cent) and concerns about existing investment performance (17 per cent). Over 32 per cent of respondents said RateSetter was their largest new investment in 2019, beating out ETFs, shares and property.
How RateSetter’s returns compare
*Annualised asset class returns as reported by Morningstar for the 5-year period to 31 December 2019. RateSetter data not provided by Morningstar. Please see below for a full explanation of how the asset class and RateSetter returns are calculated. Warning: Past performance is not a reliable indicator of future performance. Different investments reflect substantially different risk profiles.
Returns earned by an SMSF investor from the RateSetter platform in July 2019
Warning: Past performance is not a reliable indicator of future performance.
How does peer-to-peer lending work?
P2P lending, or marketplace lending, allows people to invest in a portfolio of consumer loans. P2P lending takes place via an online platform that matches investors’ funds to approved, creditworthy borrowers.
In addition to providing a marketplace, the platform operator acts, in many ways, like a traditional fund manager.
A P2P platform does have some similarities to a traditional lender. It checks a borrower’s credit, including a credit history, employment status and credit score. The platform also manages all the details with the loan like establishing contracts, organising payments between borrowers and investors, and managing each investor’s portfolio. Additionally, in the case of RateSetter and some other leading global P2P lenders, the operator manages a fund to help protect investors from any credit losses incurred in the portfolio of loans.
*RateSetter five-year performance represents average matched rate in the 5 Year Income market from 30 October 2014 to 31 December 2019. Other asset class returns based on the average performance of funds in each category as reported by Morningstar for the five year period to 31 August 2019. Data gathered from the following Morningstar categories: Australian Cash: AUS, Bond – Australia: AUS, Diversified Credit: AUS, Australian Equities Large Blend Different investments reflect different risk profiles. All figures stated represent the RateSetter Lending Platform only unless stated otherwise.
^Bonus terms and conditions apply
General information only. Consider the PDS at RateSetter.com.au before investing.