What's higher risk equities or peer to peer
Comments
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You're right on lack of understanding but wrong overall, I think.My take on P2P is that people don't properly understand the risks. Why would anyone take a P2P loan at 12% when they could use the MSE top picks at 3%? Maybe the bank is a donkey, but maybe they're taking 12% because nobody else will offer them something lower - that's priced for their risk. ...
One big issue is that the secondary market is controlled by the platforms. The lack of stockmarket-style pricing masks volatility - you can hide volatility by restricting secondary sales or only occasionally publishing prices.
What tends to happen is that those who aren't very familiar with P2P give it a higher risk rating overall than it deserves because they don't know enough about how the pieces fit together. I've only been doing it since mid 2008 but probably have a better idea than those who haven't done it at all.
Secondary market volatility first, though. Platforms either don't set prices in a meaningful way or set them to original issue price (MoneyThing) or current market new issuance price (RateSetter, Zopa). Or let buyers, sellers (Bondora) or both (Ablrate) offer prices. Most lenders hold to maturity or can, so the potential volatility of price on the secondary markets with varying price tends not to matter much. What tends to vary is liquidity, either a dearth of ability to buy, most common, or too much and slow selling. Terms tend to be quite short, with six months far from uncommon and five years available if desired, depending on place and supply. If you want short exit at maturity you can get it. It's not a big issue at all, just something to pay attention to and manage. Treating it like an instant access savings account with guaranteed access in a few days would be a mistake unless you're willing to see that change or pick only suitable maturities. While very fast access is often possible it can vanish at times.
Interest rates are more than the best buy personal loan rates of 3% and under because much of the borrowing isn't personal loans. You're not typically going to get a property development or bridging loan for 4% a year, more like 2-4% a month. For the personal loan lending a lot of people don't get the best rates either because of good but not good enough credit scores or not wanting to borrow enough for the right terms to qualify. Some just prefer the customer service and concept package of P2P.
Neither shares nor bonds has FSCS protection for investment performance. Nor does P2P. A lot of P2P does come with loss reduction protection from security, protection funds or insurance, not usually guaranteed, though. So if you want it you can beat the likely risk of both bond funds and equities by choosing those products or loans.
What the FSCS delivers to bonds of most types and equities is protection from fraud at a platform. If your share or bond broker suffers and can't pay up, you get the £50k investment protection. P2P doesn't have that, so you're exposed to the crime risk.
P2P investments normally trade at only one platform, so if that platform fails and stops offering a marketplace your liquidity will vanish and you'll have to hold to maturity.* Run-off plans to handle collecting payments have to be in place and funded or insured somehow in a credible way so that should largely work, though some plans aren't yet good enough.
You protect against the risks in the last two paragraphs by using diversification across multiple platforms and planning to be able to hold to maturity if needed.
Bonds, equities and P2P all have volatility and risk properties of various sorts and it's worth knowing about those differences. Each is useful, just different.
* Not strictly true. A mortgage lending platform that ceased doing new lending has had good success in persuading borrowers to refinance away instead of making lenders stay in for 25 years, and currently expects all or almost all money to be returned within eighteen months to two years of them ceasing to offer new loans. Generally decreasing mortgage rates probably helped with this, though.0 -
You protect against the risks in the last two paragraphs by using diversification across multiple platforms and planning to be able to hold to maturity if needed.
I think the thing for me is the market is just too small. With equities there's millions of companies (?), thousands of funds and dozens of platforms. The FSCS largely covers the platform risk, which means it's largely fine to have one platform and you should worry about fund and company risks.
With P2P there's thousands of borrowers and a couple of dozen platforms. Because there isn't FSCS protection, you have to diversify across platforms. But once you've decided on a strategy (eg lending to consumers), the number of platforms reduces even further - maybe the rest lend to businesses, or property, or aeroplanes, or whatever. Once you've crossed those off you have a handful of platforms, and you don't have to work too far down the list before they start looking sketchy.
In the equity or bond world, if you pick a strategy (eg 'emerging markets') you still have hundreds of funds to choose from. That way you can weed out ones that look a bit lame and focus on the ones that have a good track record and an acceptable fee.
P2P is a bit different because you get some control over the downstream borrower (unlike a fund where it's take-it-or-leave-it as regards their holdings). But it's still filtered through the platform.
I'm not entirely against P2P - some income funds contain secured loans, which have their place in parts of the interest rate cycle as a counterpoint to bonds. It would be quite interesting to get access to those via an ETF or similar, operated via a mainstream investment firm. I think it's the bespoke platforms and the restrictive and slightly clunky way they operate that puts me off.0 -
It's the platforms that create the risk-reward mixture that makes things interesting. A bit of clunkiness is a bit of the price paid for the returns. The returns wouldn't be as interesting without lots of people being put off by newness and rough edges.
There are more than a hundred places approved fully or provisionally to do P2P lending in the UK and I think another hundred who have to wait for full approval to start operating.0 -
Thanks James D interesting postYou're right on lack of understanding but wrong overall, I think.
What tends to happen is that those who aren't very familiar with P2P give it a higher risk rating overall than it deserves because they don't know enough about how the pieces fit together. I've only been doing it since mid 2008 but probably have a better idea than those who haven't done it at all.
Secondary market volatility first, though. Platforms either don't set prices in a meaningful way or set them to original issue price (MoneyThing) or current market new issuance price (RateSetter, Zopa). Or let buyers, sellers (Bondora) or both (Ablrate) offer prices. Most lenders hold to maturity or can, so the potential volatility of price on the secondary markets with varying price tends not to matter much. What tends to vary is liquidity, either a dearth of ability to buy, most common, or too much and slow selling. Terms tend to be quite short, with six months far from uncommon and five years available if desired, depending on place and supply. If you want short exit at maturity you can get it. It's not a big issue at all, just something to pay attention to and manage. Treating it like an instant access savings account with guaranteed access in a few days would be a mistake unless you're willing to see that change or pick only suitable maturities. While very fast access is often possible it can vanish at times.
Interest rates are more than the best buy personal loan rates of 3% and under because much of the borrowing isn't personal loans. You're not typically going to get a property development or bridging loan for 4% a year, more like 2-4% a month. For the personal loan lending a lot of people don't get the best rates either because of good but not good enough credit scores or not wanting to borrow enough for the right terms to qualify. Some just prefer the customer service and concept package of P2P.
Neither shares nor bonds has FSCS protection for investment performance. Nor does P2P. A lot of P2P does come with loss reduction protection from security, protection funds or insurance, not usually guaranteed, though. So if you want it you can beat the likely risk of both bond funds and equities by choosing those products or loans.
What the FSCS delivers to bonds of most types and equities is protection from fraud at a platform. If your share or bond broker suffers and can't pay up, you get the £50k investment protection. P2P doesn't have that, so you're exposed to the crime risk.
P2P investments normally trade at only one platform, so if that platform fails and stops offering a marketplace your liquidity will vanish and you'll have to hold to maturity.* Run-off plans to handle collecting payments have to be in place and funded or insured somehow in a credible way so that should largely work, though some plans aren't yet good enough.
You protect against the risks in the last two paragraphs by using diversification across multiple platforms and planning to be able to hold to maturity if needed.
Bonds, equities and P2P all have volatility and risk properties of various sorts and it's worth knowing about those differences. Each is useful, just different.
* Not strictly true. A mortgage lending platform that ceased doing new lending has had good success in persuading borrowers to refinance away instead of making lenders stay in for 25 years, and currently expects all or almost all money to be returned within eighteen months to two years of them ceasing to offer new loans. Generally decreasing mortgage rates probably helped with this, though.0 -
Interest rates are more than the best buy personal loan rates of 3% and under because much of the borrowing isn't personal loans. You're not typically going to get a property development or bridging loan for 4% a year, more like 2-4% a month. For the personal loan lending a lot of people don't get the best rates either because of good but not good enough credit scores or not wanting to borrow enough for the right terms to qualify. Some just prefer the customer service and concept package of P2P.
If a commercial lender would want 2-4% a month for a development or bridging loan, why would a P2P lender offer it at 4% pa? Someone has got the price wrong.0 -
The P2P lenders don't offer those loans at 4% a year. That and the 3% a year were for cheapest available personal loans, not cheapest widely available property development and bridging loans.
P2P development finance that undercuts other lenders is likely to be at about 12% to lenders, 3-5% initial fee to the platform and 0.25-1% monthly fee to platform, depending on the deal. The safest deals might be 1% initial, 7-8% to lenders and 0.25% monthly.0 -
I would put 100% of my net worth into a world tracker fund. I wouldn't put more than 5% into one P2P platform. (Assuming similar returns and much lower volatility for P2P.)
Volatility isn't risk, in this comparison. With P2P, it feels like there is some systemic risk, that a black swan might wipe the whole investment out.
In general, I don't know that the assets in P2P are worth what I'm paying, whereas I trust the prices of assets a world tracker will be aggregating.
I'm sometimes wary of using investment trusts, rather than ETFs, as they too can have systemic risk. I couldn't buy one without analysing it, same applies to P2P. By contrast I'd almost always be happy to chuck money into a world tracker ETF, without even thinking about it.0 -
I would put 100% of my net worth into a world tracker fund. I wouldn't put more than 5% into one P2P platform. (Assuming similar returns and much lower volatility for P2P.)
Volatility isn't risk, in this comparison. With P2P, it feels like there is some systemic risk, that a black swan might wipe the whole investment out.
In general, I don't know that the assets in P2P are worth what I'm paying, whereas I trust the prices of assets a world tracker will be aggregating.
I'm sometimes wary of using investment trusts, rather than ETFs, as they too can have systemic risk. I couldn't buy one without analysing it, same applies to P2P. By contrast I'd almost always be happy to chuck money into a world tracker ETF, without even thinking about it.
Yes this is exactly my view that p2p is for money where I'd not be crushed if I lost the lot not money I'm bothered about losing. Appreciating stocks are not for money you can't afford to lose but I hope you understand my point. So in my case 109k in a pension 21k in S and shares isa 18k in cash and currently 1000 I p2p (and about 1600 in a couple of Saye schemes at work but they've only just started) . I'm willing to up to 5k once I get my cash savings up in p2p maybe spread across a couple of platforms that have a history and happy to lock any for 5 years but I'll have to seriously think about more. In contrast I would like to build a 6 figure sum 100k plus in a s and s isa I would never in a million years have that much in p2p.
Hence cash, s and s p2p. I'd rate p2p as synonymous in terms of risk with individual non blue chip shares. Not small Companies but maybe ftse 5000 -
If you want to diversify in equities/ bonds etc, through a fund manager then you pay for him/ her/them mega bucks to advise. I'd never risk doing my own choices, following mega paper loss with Halifax plc. I'm warming to p2p, even more so now that p2p ISAs are available. Bear also in mind that £1000 in p2p will be lent to 100 borrowers so your risk of losing everything will only happen if Zopa or Ratesetter etc go bust. Cash investments are, in my mind, the risk. Most banks, building societies offer a (relatively) great rate for a very limited period of time. You have to be very savvy and very active to switch and swap. 'You lends your money and you takes you choice'.0
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grumpygardener wrote: »Bear also in mind that £1000 in p2p will be lent to 100 borrowers so your risk of losing everything will only happen if Zopa or Ratesetter etc go bust.
Not so much a question of losing everything. Only requires a % of borrowers to default for the rate of return to fall significantly.0
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