Trying something new is risky, but sometimes the rewards are worth taking the leap. Like most small children, I was afraid of trying new things, whether it was riding a bike sans training wheels or the first day of school in a new classroom. But over time I mastered new skills and new situations and the unknown became less scary. I gained confidence that I could succeed despite my fears.
As an adult, I’ve drawn on those childhood experiences when starting several business ventures. Being an entrepreneur is a risky path: you’re taking a chance that your idea will work and removing the safety net of a regular salary and benefits from an employer.
Sometimes it works; many times it doesn’t.
But without risk, there is no reward. In this way, investing and starting a business have a lot in common. When considering starting a business or investing in something new, it’s easy to be swayed by emotion. But it is important to keep in mind that sometimes, the path that leads to success requires embracing measured risk.
The 2008 financial crisis and subsequent market turmoil caused many investors leave the market or retreat to investments that were perceived as safe, but offered little return. When even these safe havens didn’t perform well, investors questioned their beliefs about risk and reward.
As investor behavior during the financial crisis has demonstrated, investor biases can trip up the most carefully managed investment portfolio. Many investors overreact to bad news prompting them to sell at the worst time. Conversely, investors tend to jump into a successful investment product at its peak, after most of the gains have already occurred.
Another bias that frequently hurts investors is the inability to cut losses on a poorly-performing investment, leading to even greater losses. All of these tendencies, based on fear, have the potential to inflict major damage on an investing strategy, leaving investors unwilling to take further risks.
But risk isn’t necessarily bad. It’s an investment truism that without risk, there is no reward. This is why we must learn to take measured, calculated risks based on evidence and experience, not emotion.
In today’s investment world, where traditional fixed-income investments aren’t providing the returns that investors need, it’s time to look at new alternatives that can fulfill the need for higher yields without excessive risk.
This is where consumer loans come in. By directly connecting borrowers with lenders, it makes credit available to prime borrowers at lower rates than offered from most banks, and provide individual lenders with returns that outperform the markets.
This new lending framework satisfies the need of institutional and individual investors alike for investment alternatives, as it offers diversification across a broad range of individual loans. The result is steady returns that don’t fluctuate with the market’s volatility, beating many other types of fixed-income investments. It’s clear that more investors are discovering the benefits of investing in consumer loans.
If you’re considering investing in consumer loans, take the time to learn more about them, or any prospective investment before jumping in. The best way to dispel fear about investing is to examine the track record of any investment you’re considering purchasing. By doing your due diligence and confirming that the company sponsoring the investment has a strong track record of success and expert top management, you take some uncertainty out of the process.
Investing always carries some element of risk, but the more you know about your investments and how they work, the less room there is for fear.
Renaud Laplanche is the CEO of Lending Club. Renaud has appeared in many leading publications including Forbes, New York Times, Washington Post, USA Today and Barron’s. Renaud has been featured on CNBC, ABC News and Fox Business Network. Before Lending Club, Renaud was the founder & CEO of TripleHop Technologies, an enterprise software company acquired by Oracle Corporation in June 2005.