Relative risk of investments

pip895

I have a chunk of cash that has just dropped out of a fixed rate bond (was getting 4.1%). Best rates I can get now (I already have a 123 account etc.) are close to 3% and only if I lock it away for 3 years or so- which has its own risks, so I am considering other options. Just as background we are retired and trying to live off our investments.


I already have a SIPP + S&S nisa's fully funded and some unbundled funds too - I would prefer something a little safer for this part of the portfolio. I was considering P2P, but wondered if it was really any safer??- how does it compare to something like Standard Life GARS or Troy Trojan for example.


Not sure I fancy guilt or bond funds much at current valuations - I have corporate bonds in my S&S portfolio. A bond ladder has been suggested - not sure how to go about building one or if I would end up with any more than 3% anyway.:undecided


Does P2P fit in about in the middle, or is it higher risk than say the safer Absolute Funds. My current thinking is -


Low Risk
1.Cash - deposits/bonds (2 to 3%)
2. Bond ladder (~3%??)
3. P2P - e.g. Rate Setter (3%-5%)
4. Targeted Absolute/bond funds (some only!) (~5%)
5. P2P - Funding circle (6-7%)
6. Equity (8% average)
High Risk


or am I way out on this?

Drp8713

What about something like an Infrastucture Investment Trust? The income is solid and the capital value shouldnt be too volatile even when interest rates rise.

Having said that, people have noticed this and they are all on hefty premiums.

pip895

I have IT's but always bought on a discount - I don't fancy them much on a hefty premium. I have infrastructure funds as well - they seem to largely track with other equities though and I would put them well above things like SL GARS etc. on the risk scale.


In general there should be a clear correlation between risk & reward - but at the moment there appear to be a number of anomalies. In the positive corner are current accounts giving 3 to 5% - on the negative side you have things like "high yield" /dodgy looking third world debt yielding only 4%. I suppose I am trying to work out which corner P2P is in??

Rollinghome

I suspect a lot of people will be in a similar position after grabbing those 5 year fixes at around 5% in 2009 as interest rates started to fall.

Article on FT examining the risks/rewards of P2P lending here... (or Google link here...)

On the two funds you mention, they've a wide remit so it depends very much on the skill of the managers and what they happen to be invested in. Troy Trojan has heavily hedged against inflation for a long time with big positions in gold and I/L gilts that has cost it. Over 9 months or so from about April last year it lost 8% over a period when the FTSE returned about 10%: which shows that the crystal ball of Sebastian Lyon may be no better that anyone else's.

GARS can take long and short positions on equities, currencies etc. and at best you might only get some idea of what they've been doing retrospectively (for July here). It's a huge fund that's consistently done well and you'd hope it would do well if there were a major correction. For the investor, it requires as much faith as judgement.

I'm with you on buying ITs on big premiums. You can see from this board that there's been a big rise in their popularity among newer investors who'd hardly heard of them when some of us used to bang the drum for them here a few years ago.

The resulting narrowing of discounts and some premiums can look plain silly at the moment and there could be some tears ahead. If there is a correction, as there always has to be, then the premiums disappearing will double the pain. Time to tread very carefully and, with the total cost of open-ended funds and platforms having come down, the equivalent UT can now often be the better option

As always the answer is likely to be to hedge your bets.

pip895

After perrusing that link and a few others I'm still not completly sure whee P2P stands on the risk scail - I guess it is at least a different risk than equities so should help diversify my portfolio.


I think after picking the low hanging fruit among the current account options, I will put half the rest into a 1 year bond (probably Yorkshire BS at 2%) and use the other half to dip a toe in the P2P pond - probably via Rate Setter and Funding circle. I have another bond maturing in about 18months - I hope there are better pickings by then!?

Rollinghome

pip895 wrote: »

After perrusing that link and a few others I'm still not completly sure whee P2P stands on the risk scail - I guess it is at least a different risk than equities so should help diversify my portfolio.

Perhaps the biggest risk with P2P lending is that it hasn't been around long enough to assess the risk with absolute certainty, i.e. to know what could trigger a problem or the outcome in all circumstances.

As Mr Rumsfeld put it:
"There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns."

So certainly worth considering but, as with all investments, not to the extent of betting the whole farm. Zopa quotes a rate of 4.00% for 3 years after fees etc. which is hard to get too excited about. On balance I 'd just as soon take my chances with the markets unless I felt tempted to put serious money into it, which for 4%, I'm probably not.

Linton

I think it is misleading to put investments into a low risk/high risk league table. There are many different risks, any investment will incur different levels of each, none are risk free.

For example cash deposits have the risk that they wont match inflation and and that the bank can decrease interest rates with little warning. Fixed term deposits, P2P lending, and BTL have the risk that the money wont be available for perhaps years should you need it in an emergency. Investing in a single equity has the risk of losing everything, but investing in a broad fund reduces that risk to practically zero. However both have the risk that fluctuations in value will cause you stress leading you to sell out at a loss.

The skill in investing is to ensure those risks you regard as important of one investment are mitigated by your other investments.

pip895

Thanks for your input - whilst I agree it is an over simplification the definition of risk as the likelihood of capital loss - i.e. the area under the graph of probability against % loss, over a given period, is still quite useful. With something like P2P the data for compiling such a graph simply isn’t available so all we can do is draw parallels with vaguely similar investments.


At the moment I don’t feel I can really judge whether P2P is any less risky than say a ftse tracker. My current take is that it is different - probably less likely than a tracker to loose me say 20% but with a greater although hopfully small possibility of losing me 100%. I am willing to give P2P a try, but only with a small percentage of my overall portfolio.;)