Principal protection is one of the most important parts of investing. Nobody wants to lose their hard-earned money, especially when investing and trying to earn more of it through compounding interest. That’s where asset-based investing comes in handy.
If you are going to protect your principal investment, you need to limit risk. There are a few ways investors limit risk.
You can limit risk in the stock market by investing in the S&P 500, an index fund of the top 500 companies in the nation. Thus, allowing investors to invest in the overall market rather than volatile individual stocks.
Investors can also limit risk by putting their money in asset-based investments. Below, we’ll walk you through everything you need to know about asset-based investing and how to better protect your investments.
What Is Asset-Based Investing?
Asset-based investments are investments backed by a tangible asset. Things like real estate, land, and technology are examples of asset-based investments.
Key characteristics of asset-based investing include:
- Diversification: Asset-based investors often diversify their portfolios across various asset classes to spread risk and potentially enhance returns. Diversification can help mitigate the impact of poor performance in any single asset class.
- Long-Term Focus: Asset-based investing typically has a long-term horizon. Investors aim to benefit from the compounding effects of holding assets over an extended period, allowing them to potentially capture market growth and weather short-term volatility.
- Income Generation: Certain asset-based investments, such as dividend-paying stocks, bonds, and rental real estate, can generate regular income for investors through dividends, interest payments, or rental income.
- Risk and Return Trade-Off: Different types of assets carry varying levels of risk and potential returns. Asset-based investors carefully assess the risk and return characteristics of each asset class to create a balanced portfolio that aligns with their financial goals and risk tolerance.
When you do asset-based investing, you protect yourself by obtaining high-value collateral. While you want your investment to succeed, you always have the collateralized asset as backup protection.
What makes asset-based investments an excellent investment vehicle is how the asset has stand-alone value. Since the investment holds value on its own and acts as collateral, the risk is limited for investors. If the borrower can’t hold up their part of the deal, the lender gets the asset.
How Are Asset-Based Investments Different from Stock Market Investments?
There are a few key differences between asset-based investments and stock market investments in terms of principal protection.
Asset-based investments are tangible and hold stand-alone value. If you invest in a tangible asset and the borrower defaults, the asset acts as collateral.
The stock market, however, is not backed by tangible assets. You are investing in intangible stocks that only hold value if the company has value. If you invest $100,000 in the stock market and the company goes bankrupt, your investment won’t be worth anything.
Asset-based loans are much easier to receive than unsecured loans and lines of credit because the asset acts as collateral. For example, banks have no problem lending you a $500,000 loan for a home because they inherit the property if you can’t pay it off. And even though you defaulted on your loan, the asset still has a $500,000 value.
Should You Invest in Asset-Based Investments?
The stock market is a great way to invest, but there is a lot of risk and uncertainty that comes with it. It’s much safer to put your money in asset-based investments because they hold actual value. Here are a few reasons why you should invest in assets rather than the stock market.
Diversification
Diversification is an essential component of principal protection. For example, even stock market investors put their money in different industries to limit losses in a market downturn. Asset-based investors can do the same thing by investing in differently performing properties, like single-families, multi-families, or commercial real estate.
Asset-based investments are another way to diversify your portfolio with the added benefit of a stable income source.
Low Stock Market Correlation
Individual stocks follow the market. If the overall market is in a downtrend, then the odds are, the particular stock is trending downward too. Asset-based investments do not correlate with the stock market, so asset values don’t swing with the market.
If the stock market crashes and the economy is poor, property values may decrease with demand. But the swing is not as drastic as the stock market. During the pandemic, the stock market plummeted, and investors lost almost 50% of their portfolio in a matter of weeks. Asset-based investments only see a small fraction of that volatility because of their stand-alone value. So investing in assets is a great way to avoid the massive swings of the stock market.
Consistent Cash Flow
You might get dividends when you put your money in the stock market, but not all stocks offer this luxury. Investing in asset-based investments like real estate can generate monthly cash flow from rent. Renters their mortgage every month, so you are still guaranteed a monthly payment even if the property value goes down. In addition, you don’t have to sell to make money as you do in the stock market.
How to Get Started With Asset-Based Investing
There are a few different ways investors can put their money in asset-based investments. For example, you can buy real estate properties and technology on your own, or you can find someone to do it for you.
I’m sure you know a few people who have built their wealth from the ground up by investing in real estate. If not, just turn on the TV. Cable is filled with shows about house flippers and real estate developers doing huge deals.
Although it may seem so simple on TV, learning how to properly invest in real estate can take years.
Fortunately for you, there is an easier way to invest in asset-based investments where you don’t have to learn all the tricks of the trade. You just have to know someone who does. That’s where we at Yieldi come in.
Yieldi is a private lender that offers asset-based investments backed by validated collateral such as real estate, commercial, and residential property.
How it works is simple. We send you the newest offerings when they are available. You identify an investment opportunity and commit to an investment amount. Let’s say you invest $100,000 at 9.5% interest. You fund the investment and get paid a payment of $791.66 by the 15th of the month. Once the loan reaches maturity, you have the option to reinvest or receive the principal you paid back.
Once upon a time, this type of asset-based investing was only available to a select group of people. Our goal at Yieldi is to make it accessible to all kinds of investors. So, if you would like to become an asset-based investor and protect your principal, find an opportunity by viewing our offerings.
If you want more information regarding the process or how it works, contact us online, and one of our experts will reach out to you. We are more than happy to help.