Peer-to-peer lending sites: MSE guide discussion

takesyourchances

Great reading on this topic and good point by Grey Gym Sock on Jamesd knowledge with investing. I enjoy James posts, but I am not on his level of knowledge I freely admit that and come here to learn and share my ideas etc.

@Jamesd on your previous post - "8. Direct to consumer lending with both unemployment insurance for borrowers and protection fund, one platform offers this" - Would that one platform be Lending Works?

I also read on the P2P forum regaridng MT and issues with some more property developments. I have not invested any new funds with MT from around November time now with a lot of property development loans and same with Collateral going this route too. I am trying to steer away from large development loans now with enough in them overall which brought me to unbolted for other types of loans.

Albrate has become my preference out of the self select accounts and also having the ISA with them.

I am thinking to pull my funds from Assetz Captial and put them into my Lending Works account. Don't think the provision fund is what it was made out to be on AC after reading the P2P forum. I want an element of hands off accounts in P2P that I can leave and have a level of protection, hopefully.

Unbolted is taking time and a bit each day matched at the moment, will add more of what Collertal would of been getting had they been doing more bling, I will top up once some of my cash balance in unbolted gets matched. I would like to aim to 2k and see how it performs.

I am still sticking to my S&S ISA as well, I don't have the indept knowledge Jamesd has and I go for the buy and hold with my S&S ISA etc as I would rather not tinker and leave it long term. I am 38 so hopefully plenty of years ahead investing. I like the P2P concept, so using it as part of my overall investing.

jamesd

grey_gym_sock wrote: »

i'd disagree that expected returns from US equities are negative. you may get that result by using the unadjusted CAPE10, but there are good reasons - the big one being changes in accounting standards - to adjust it. the raw CAPE10 figures are not comparable to the figures before accounting standards changed.

a discussion of that, and other reasons to adjust CAPE10: http://www.etf.com/sections/index-investor-corner/swedroe-seeing-valuations-clearly?nopaging=1

so i think we should be working from lower-than-usual expected returns for US equities, but not negative.

There certainly are interesting discussions but they don't ever seem to get to a conclusion other than equities being at relatively high values. Lots of them also look like "this time it's different" arguments and those have a nasty habit of being wrong. We've seen rule changes before but the answer still looks high.

grey_gym_sock wrote: »

method 1: cut the percentage in equities, instead hold more in something lower-risk (bonds/cash), with a view to increasing your equities allocation again when valuations are more favourable.

this is a very bad idea.

various studies show this method failing to improve returns. despite the CAPE10 having some predictive power for returns from equities over the next 10 years or so. but it's the effect of a strategy on the whole portfolio that matters.

The context matters here and mine is retirement safe withdrawal rates. Guyton's work showed that this produced significant improvement. But to understand that you really need to know what affects SWRs. The most important issue is that they are constrained by the worst cases, not averages. So if you reduce the magnitudes of the worst cases you can produce a big improvement in safe income level. To illustrate, here are the income levels I calculated for someone with various percentages of histoic success rate:

"47%: £28,877. Value suggested by Blanchett for a person with absolute minimum income need of 50% of their income, guaranteed income equivalent to 50% of their wealth and medium income stability need. 1st, 2nd & 3rd [parts of retirement]median incomes of 28,878, 17,052, 22,469.

75%: £24,420. Commonly used by financial advisers in the US. 1st, 2nd & 3rd median incomes of 24,420, 17,802, 21,758.

90%: £20,656. 1st, 2nd & 3rd median incomes of 20,656, 18,590, 21,961.

95%: £17,909. cfiresim default

100%: £10,554. If you were unfortunate and retired at a repeat of the worst times this is where you'd need to start."

The lower than 100% cases mean that historically there were retirement years where subsequent returns would have made it necessary to cut income more than provided in the base plan.

Surveys of P2P investors show lots of retired and retirement age people. But for someone younger, pure maximising of returns is what's likely to be most important. Though the effect of lower drawdowns interacting with risk tolerance might be interesting.

grey_gym_sock wrote: »

method 2: underweight US equities (where CAPE is currently high), and instead overweight equities in other parts of the world (where it's not so high).

IMHO, a reasonable strategy.

if you can stick with it, of course - as always applies in investing. the US market could just keep powering ahead of other equities markets: will you stick with underweighting it, or eventually cave in and move investments back to the US - perhaps just before the US does start underperforming?

it is best not to go too extreme with this kind of underweighting. partly so you'll find it easier to stick with it. partly because you are less diversified if you have little or nothing in the biggest equities market in the world.

I do this, in combination with other things. Shiller has said in recent years that he's also done it, mentioning some use of Portugal a few years ago. I've been overweight Europe, Asia and a touch emerging markets for a while.

grey_gym_sock wrote: »

method 3: move some capital from expensive US equities to p2p (but only p2p where returns before defaults are at least 10-12%, and where there some kind of security, and the risk seems reasonable, and there aren't red flags over the borrower or the platform, etc, etc).

i believe this is something like what jamesd is doing.

i think the argument that expected returns from this approach to p2p are higher than expected returns from equities is plausible.

Yes, I'm doing this and not just for US equities because the correlations apply to other markets as well. P2P at the moment has likely returns well above bonds and even historic average UK equity returns, so the potential downside of not being in equities is greatly reduced.

grey_gym_sock wrote: »

however, it does require a lot more care - both time, and skill, to do this properly. you need to evaluate the platforms and loans for yourself. it's certainly much more difficult than to do this properly than it is to buy and hold a US equities tracker properly. and IMHO, some people are likely to make bad decisions about which p2p platforms/loans they put themselves into.

so, while i wouldn't be surprised if jamesd knows what he's doing here, i'm i bit concerned about some (not all) of the people who might try to follow his lead.

Getting platform and loan choices right does matter. I pay attention to everything you wrote about, of course. Hopefully others take care with their own research.

jamesd

grey_gym_sock wrote: »

i can't comment properly on this, as i haven't tried reading guyton (or related work).

though i am perhaps a little put off if he's using unadjusted CAPE10 (which there are issues with, as i mentioned in my previous post).

however, if the broad idea is that retirees who are de-risking should be doing one-way rebalancing - i.e. sometimes they should sell equities to buy bonds/cash, but never the other way round - and that valuations should have some role in deciding when or how fast they should sell equities, ... then that does sounds generally plausible.

He used unadjusted but if you wanted to adjust you could.

jamesd

takesyourchances wrote: »

@Jamesd on your previous post - "8. Direct to consumer lending with both unemployment insurance for borrowers and protection fund, one platform offers this" - Would that one platform be Lending Works?

Yes.

takesyourchances wrote: »

I also read on the P2P forum regaridng MT and issues with some more property developments. I have not invested any new funds with MT from around November time now with a lot of property development loans and same with Collateral going this route too.

Nothing wrong with that, you should be making decisions of that sort when you see uninteresting prospects.

takesyourchances wrote: »

Albrate has become my preference out of the self select accounts and also having the ISA with them.

Same here.

economic

jamesd wrote: »

Here's a chart showing the history of the Shiller cyclically adjusted price/earnings ratio, also known as CAPE or PE10.

After the initial equity drop in early 2008 I set up pension salary sacrifice down to minimum wage, knowing that more drops were possible. Around March and April 2009 I moved almost all of my P2P money and money from credit card stoozing into equities. Just being over or under the average isn't enough to act, it has to be enough to matter.

No. In the US it's currently at a level that has only been exceeded before the crashes of 1929 and dot-com bubble.

Guyton used PE10 in his work on how to reduce the effect of sequence of return risk on those doing income drawdown. Published at Sequence-of-Return Risk: Gorilla or Boogeyman? and commented on by respected retirement researcher Wade Pfau in Jonathon Guyton Tames a Gorilla. The Gupta et al rule Guyton uses for his action threshold says:

"P-E10: if the S&P's normalized P/E ratio is less (greater) than its historical mean plus (minus) one-half its standard deviation, the stock allocation in the rebalanced portfolio is decreased (increased) to 25 percent below (above) the baseline allocation"

Guyton kept the one standard deviation threshold but modified the shift:

"Because of my sense that most financial planners (including myself) may be uncomfortable communicating so large a one-time equity allocation change to their clients, in modeling the dynamic allocation policy I use a 65 percent neutral equity allocation with just under a 25 percent shift to 50 percent (80 percent) when an over- (under-) valuation occurs"

That one standard deviation range means that the 68% of values around the mean produce no action beyond unwinding the shift that was just made and going back to normal.

A chart showing PE10 with +/- one standard deviation ranges (not half) is here.

Today it's about 25% and I'b be comfortable as high as 75% or so. Provided I can find enough loans I'm comfortable with over a sufficient range of platforms.

There's a good deal of tail risk, particularly to liquidity. While the mandatory run-off requirements of the FCA should protect the money pretty well I doubt that many secondary markets would stay open. And some people will undoubtedly try to avoid repaying in that situation.

How old are you if you don't mind me asking? I think using CAPE as a retiree probably does make sense as some sort of rebalancing and withdrawel rule makes sense as long as it makes sense in theory at least.

I am 34 and am 70% in stocks, 10% P2P (which i am derisking) and 20% cash. Total pot around 530k.

economic

https://imarketsignals.com/2017/forecasting-stock-market-returns-shillers-cape-ratio-35-year-moving-average/

grey_gym_sock

jamesd wrote: »

The context matters here and mine is retirement safe withdrawal rates.

that makes some sense.

what i was calling "a very bad idea" was investors who don't need to reduce their exposure to shares - in general, they are at the right risk level for them - but who are thinking of selling some shares now (because shares look a bit expensive), planning to buy back shares later on. this approach is unlikely to improve their portfolios' returns.

it is rather different if somebody knows they need to scale back their exposure to shares relatively soon (typically, because they are approaching retirement, or in early retirement). in that case, shares looking a bit expensive may well be a good reason to do some of that scaling back sooner rather than later.

(i've put this is vague terms - "expensive" and "scale back", rather than some formula for how much to sell based on CAPE vs average CAPE or whatever - ... mainly because i haven't read about this is in detail. though there is so much uncertainty in investing that often, though the formulas may be interesting, a vaguer version is good enough.)

economic

grey_gym_sock wrote: »

that makes some sense.

what i was calling "a very bad idea" was investors who don't need to reduce their exposure to shares - in general, they are at the right risk level for them - but who are thinking of selling some shares now (because shares look a bit expensive), planning to buy back shares later on. this approach is unlikely to improve their portfolios' returns.

it is rather different if somebody knows they need to scale back their exposure to shares relatively soon (typically, because they are approaching retirement, or in early retirement). in that case, shares looking a bit expensive may well be a good reason to do some of that scaling back sooner rather than later.

(i've put this is vague terms - "expensive" and "scale back", rather than some formula for how much to sell based on CAPE vs average CAPE or whatever - ... mainly because i haven't read about this is in detail. though there is so much uncertainty in investing that often, though the formulas may be interesting, a vaguer version is good enough.)

Nicely put and completely agree. I think generally something like CAPE may give a "decent" indication of how much stocks have gone up rather then how expensive it is. IMO stocks now are not particularly overvalued, maybe expensive in the US but there are very good reasons for that.

So the strategy that is based on CAPE is just one way of saying "oh look stocks have had a decent run and i am approaching or in retirement, so i better scale back on stocks". Rather then CAPE being any indication for value.

Better to use the strategy by retirees then not use any strategy and instead selling whenever they feel like it.

I do think it needs to be back tested not just back 30 years but back 100 years at least. I am not convinced it is completely fool proof (there maybe scenarios that it becomes inferior in terms of results compared to a more static approach).

bigadaj

The whole debate is now little about p2p and is becoming an esoteric discussion about economics generally.

Cape is fine but again the devil is in the detail, pe is obviously relevant as the value of investments will vary as the perceived return and future return is measured, varied and is assessed as both being sustainable and attractive in absolute terms and relative to other assets. It's the ca that is the issue, who knows where we are in an economic cycle at the time, it's always acknowledged retrospectively which doesn't help your investment strategy when needed.

Back testing 100 years takes us back to a time when stock markets were very new and the world was a different place, I'm s suspicious of a new paradigm as most but the world is genuinely a different place now.

Ultra low interest rates together with QE as well as even further injection of free money means that returns from stocks, and indeed most asset classes, haven't been massively impressive, it's primarily that the value of the pound, as well as the dollar and most other currencies, has been reduced by the money printing.

Going back to p2p then it's not like it's brilliant and its not a disaster, different platforms and actually loans are different beasts, some will survive and may well thrive, others will collapse and investors will lose money, it's just the way of the world. There's decent returns to be made if selective and accepting of some defaults, over on p2p forum then many seem to prefer to gripe rather than vote with their feet/ wallets which is the only effective response.

economic

bigadaj wrote: »

The whole debate is now little about p2p and is becoming an esoteric discussion about economics generally.

Cape is fine but again the devil is in the detail, pe is obviously relevant as the value of investments will vary as the perceived return and future return is measured, varied and is assessed as both being sustainable and attractive in absolute terms and relative to other assets. It's the ca that is the issue, who knows where we are in an economic cycle at the time, it's always acknowledged retrospectively which doesn't help your investment strategy when needed.

Back testing 100 years takes us back to a time when stock markets were very new and the world was a different place, I'm s suspicious of a new paradigm as most but the world is genuinely a different place now.

Ultra low interest rates together with QE as well as even further injection of free money means that returns from stocks, and indeed most asset classes, haven't been massively impressive, it's primarily that the value of the pound, as well as the dollar and most other currencies, has been reduced by the money printing.

Going back to p2p then it's not like it's brilliant and its not a disaster, different platforms and actually loans are different beasts, some will survive and may well thrive, others will collapse and investors will lose money, it's just the way of the world. There's decent returns to be made if selective and accepting of some defaults, over on p2p forum then many seem to prefer to gripe rather than vote with their feet/ wallets which is the only effective response.

your point of assets rising hasn't been that great given ccy deval - inflation / purchasing power is what matters and stocks and bonds and property have all beaten inflation over the last 10 years since global QE. Your argument seems a pointless one.

All PE tells you is how much earnings on average does the price of the index buy you. thats all it is. a simple metric. it doesnt tell you how much earnings will growth. you can say if PE is way above historical average then its expensive, but thats assuming the historical average is where fair value - a very silly thing to believe in IMO.

P2P is a very new asset class and has not been tried and tested in a recession (with the exception of Zopa which was very small back in 2008 and underwriting standards much much better then they are now). The way i see it is sure you can make depending on platform between 5-12% with by far most individual loans around 5-6%. How do you know the risk is being priced properly when you decide to invest in them? It maybe appropriately priced now under a growing economy, but what if there was a severe recession AND rates moving higher? Surely 5 or even 12% is not worth it given the much more likelihood of defaults and illiquidity whilst recovery processes take place??? With P2P once there is a default, you face permanent capital loss - which can add up to a lot during a recession. With equities (in the form of a diversified portfolio), in a bear market, if you are young enough, you can recover those losses most likely.