What % do you put into P2P ?

pardal51

have also been thinking about, but read this article about p2p in China and re-thinking whether it is a good idea or not.....

bowlhead99

saver861 wrote: »

Clearly anyone can do significant research and assess the range of risk etc. However, regardless of how much research you do and determine to the n'th degree the validity of that risk, you are still dependant on many factors beyond your control.

Well, part of the reason that some attractive investment opportunities even exist is precisely because "Clearly *not just anyone* can do significant research and assess the range of risk etc".

E.g.
1) I might have the ability to assess the range of risk and be interested in it as a hobby but not have the time to do the research.

2) My grandmother would have the time to do the research but not the ability nor the desire to do it.

3) A professional credit investor for a pension fund would have the time (because it's his full time job) and the ability (because he's a credit markets professional) but would not have the inclination to do it because he's trying to deploy £0.5 billion and a £100k ticket for some decent quality private debt on a bridge finance deal would not move the needle. He would need to do 5000 such deals to deploy 1% of his capital and three months later it might have all been paid back and he has to start again.

So, there are some good rates out there for a given level of risk which you can pick up, and if you have the time, ability and inclination you can put the effort in and get a good reward because the market is immature and some of the deals will have a very favourable price due to lack of competition. Others of course will be dogs.

But yes of course you're right that despite one's best efforts, there are factors beyond your control. But there are always factors beyond your control in any type of investing - that's why you get paid: for taking risks. So the mere existence of risk shouldn't put you off.

To focus most of your money in one asset class in one or two countries and currencies, creates a concentration of risks so is best avoided *but* the expected risk/reward may be more tolerable if you spread across business type, industry sector, platform etc etc.

As an analogy: a professional poker player playing poker every time he goes to a casino is not idiotic if it's the only game where he can exploit his skills to have an edge over the competition. Diversify among casinos to get exposure to a good broad range of bad tourist players to help make your returns. But "diversifying" into blackjack, craps, roulette and slot machines merely produces lower returns - because in those other games you're only playing against the house and the house has an edge.

Similarly, "diversifying" from p2p lending into long maturity government bonds, with a 0.5% real yield to maturity (joining the market where the aforementioned pension fund credit professional is investing his half billion, driving down the returns) is not smart, even though the book says it's good to be diversified. Better to keep that part of the portfolio in cash.

Sure! - if you put two ugly women together, one might look less ugly than the other ... however, it does not make her pretty!!

I'm reminded of a piece from one of Personal Assets Trust's quarterly letters a couple of years back on the curse of "relativitis". Invest because something is good and not because it's least worst.

The practical danger of relying on relativism and ignoring absolutes when making choices was neatly illustrated by Joey Barton, the outspoken Queens Park Rangers footballer, when he got himself into trouble on Question Time at the time of the European elections by describing UKIP as being ‘not the worst’ of four ‘really ugly girls’ (the others, in this context, being the Conservatives, Labour and the Liberal Democrats). Barton’s view seemed to be that he was obliged to choose the least unenticing of the options confronting him. But instead, and depending on the situation in which he found himself, he could have spoiled his ballot paper in the European elections or waved a cheery farewell to all four girls and gone to bed with a good book.

A salient lesson for us all when frustrated that cash returns are poor and equity and bonds prospects in some corners of the globe, unenticing.

But even if you determine it is a genuinely a good option, putting more than 75% of your investments into it does sound like its either going to end up very rosy or very tearful. It might be that the investments will make good returns and that the 75% can be pulled out prior to crash etc. so its not to say it can't work good. However, how many on here would do the same, be it your uninformed granny or your financially astute uncle!

Perhaps; very few would do the same.

But the question from the OP was not "what is exactly the amount of my wealth that I should deploy in p2p opportunities to fit my personal circumstances". It was how much do you have in p2p. So Jamesd's enlightening response was 75%, but it wasn't ridiculous (because he has rationally considered the options) and it wasn't a recommendation - because suitability of that approach depends on wealth, earnings capacity, goals, needs, comprehension, tax status etc etc and your comparative assessment of all the other investment options on the planet.

masonic

pardal51 wrote: »

have also been thinking about, but read this article about p2p in China and re-thinking whether it is a good idea or not.....

Well, if you were considering P2P in China, then you'd be braver than me. I don't know the first thing about the Chinese P2P market, but if it is anything like its stockmarket, it is probably quite treacherous compared to that of the UK.

You don't have to look as far as China to find an example of misconduct in a P2P platform. TrustBuddy, which operated in Sweden immediately springs to mind. I'm sure there are others.

jamesd

saver861 wrote: »

Good luck with that one ..... I don't think there would be many on here ... or anywhere else .... that would endorse that as a sensible strategy. ... Personal choice, yes of course, ..... sensible? ....... not from where I'm looking!!

Which probably mainly means that you don't know enough about P2P and its risks relative to other investments.

The risk is lower than with equities, particularly at the moment, and the potential returns are above the long term UK stock market average. Of course lower risk doesn't mean no risk and there are important issues to understand and manage with P2P as with other investments.

saver861 wrote: »

the 75% can be pulled out prior to crash etc. so its not to say it can't work good.

Things like that indicating lack of understanding of the area. There is no crash potential in any conventional sense. Instead the biggest risk is a major fraud loss at a P2P platform company and that's kept below the stock market downturn risk potential by diversifying between platforms as well as borrowers. Having yields which could cover the loss of all money invested with a single provider inside a year helps significantly with the overall risk profile.

Lots of security could be affected if say there was very high concentration in property construction and those markets slowed, particularly the commercial property market that's now looking on the high side after years of being relatively cheap. Commercial property construction isn't an area where I think that the risk-reward balance is likely to be as good as I seek at the moment.

saver861 wrote: »

I recall jamesd saying on another thread that he plays the 0% credit cards and had an amount I think was over £50k on the cards which he was putting into p2p. I milk the 0% cards for all I can but I also ensure I have the money accessible ready to pay off the cards should I need to. Not sure if that £50k is part of the 75% or not but it sounded like a bit of extra risk to me.

Your recollection is right but not your implication that P2P is illiquid and not available to pay off cards when desired. Most of the interesting P2P is very liquid and I'd expect with say £200k invested to be able to extract £50k and have it in my own bank account within a day at the moment. A few days longer to get all but perhaps the last £50k out, that last 50k taking longer. Worst likely case would be holding some loans to maturity then extracting. With renewals sometimes happening every six months and deals of six months or a year also regularly expiring, the option of waiting wouldn't be unduly slow either, given that I know and track when card deals end.

I am doing some deals that are too big for most. Things like £30k invested at around 19.5% secured on used cars being refurbished or £75k at around 15.5% in another business. But more typically it's £1k per business loan and also a per borrower cap lower than those and rates more like 10-13%. Those bigger amounts are capped by my maximum acceptable loss from one deal. For context, though, my gross income these days is getting on for those sorts of levels, boosted as it is by perhaps 15-25k of non-work investment income including P2P for the coming year. With VCT purchases and pension salary sacrifice my net worth is also increasing at a rate pretty close to my annual income, partly due to low tax burden.

saver861

bowlhead99 wrote: »

But yes of course you're right that despite one's best efforts, there are factors beyond your control. But there are always factors beyond your control in any type of investing - that's why you get paid: for taking risks. So the mere existence of risk shouldn't put you off.

Risk is not a bad thing .... risk is a good thing. Otherwise you put it all under the mattress and lose it, by at best to inflation. I have had around 20% in higher risk investments. They have done well enough for me to leave them there.

The point though would be what is the intended purpose.

For many, there is a target for investments to achieve, which might be a pension fund to retire, an intended significant upscale on housing, family financial security, or maybe just to buy a speed boat.

Thus then the risk has to be commensurate with the goal. Clearly it will take a time to get enough coffers together on 0.5% Gov bonds to make the speed boat. Might as well forget it. Equally, in 2007 you might have been in touching distance of that speed boat only to find twelve months later the goal has been well and truly sunk. You just gonna have to stick with the paddle boat a bit longer.

On the other hand, there are those who are working towards financial security for them and their families have a different hurdle to contend with in such circumstances. Putting near everything in p2p would not seem sensible for such circumstances!

bowlhead99 wrote: »

But the question from the OP was not "what is exactly the amount of my wealth that I should deploy in p2p opportunities to fit my personal circumstances". It was how much do you have in p2p. So Jamesd's enlightening response was 75%, but it wasn't ridiculous (because he has rationally considered the options) and it wasn't a recommendation - because suitability of that approach depends on wealth, earnings capacity, goals, needs, comprehension, tax status etc etc

As above, much depends on the goals. However, often it is quoted don't invest more than you can afford to lose. So, if you can afford to lose then good luck. If it comes off, bingo if not, just shrug the shoulders.

However, if you look at the responses on this thread, many have 0% in p2p and many others are less than 10%. Clearly no way scientific but it might be indicative.

You might well be satisfied that someone can do adequate research and, as a result, conclude that it is a good option to put 75% in to p2p. Equally it could be concluded that, many others have done similar research and deemed 75% in p2p is not a good option!!

jamesd

bigadaj wrote: »

Risk is such a gradational and personal issue and can only be assessed in hindsight, looking at vct performances on trustnet suggests that many if not the majority of vct funds are lower risk than mainstream equity for example.

Asset backed VCT is a substantial portion of the non-P2P portion of my investing. 30% HMRC discount plus five years of 10% tax free income until the five year minimum holding period ends. Does good things for the range of potential loss...

pardal51 wrote: »

have also been thinking about, but read this article about p2p in China and re-thinking whether it is a good idea or not.....

China is definitely not a good place to go with P2P right now. Way too much fraud over there. For a closer example look at say the Sweden based P2P business TrustBuddy where there seems to have been extensive fraud and where recovery for lenders appears unlikely to exceed 50%.

jamesd

saver861 wrote: »

For many, there is a target for investments to achieve, which might be a pension fund to retire, ... financial security ... Thus then the risk has to be commensurate with the goal. Clearly it will take a time to get enough coffers together on 0.5% Gov bonds to make the speed boat. Might as well forget it. Equally, in 2007 you might have been in touching distance of that speed boat only to find twelve months later the goal has been well and truly sunk. ...

On the other hand, there are those who are working towards financial security for them and their families have a different hurdle to contend with in such circumstances. Putting near everything in p2p would not seem sensible for such circumstances!

On the contrary, that is what makes putting so much in P2P sensible at the moment.

You may have missed much of the point about government bonds. The risk there is an increase in interest rates to more normal historical levels that produces an unrecoverable capital loss. While the UK hasn't reached it yet, even new government bonds in some places have been selling with an expected return that is negative. Government bonds are traditionally regarded as very low risk but at the moment the interest rate situation means they aren't low risk, just low volatility, though higher than P2P.

Similarly for equities, though there the risk isn't a one way interest rate move. Rather, it's just the normal market volatility and its production of sequence of returns risk. With many markets at levels well above historic averages it's not the best of times to be invested in them. I've no objection to being out of markets when prices don't look favourable. Nor to moving heavily back into them when that changes.

I first achieved potential financial independence a year or three ago and also relatively recently reached my original retirement pot size target. Preserving that capital is a significant part of why I'm moving so heavily into P2P at the moment. But also with an expectation of getting returns that will beat long term UK market returns. Until the next big equity market downturn. At which point the risk picture also changes and so will how I'm investing my money.

saver861

jamesd wrote: »

Which probably mainly means that you don't know enough about P2P and its risks relative to other investments.

My knowledge on all types of investments is little more than average. I have not worked professionally in any area of finance so anything I know is out of interest and self taught. However, I don't know what I don't know - which could be significant!

jamesd wrote: »

Things like that indicating lack of understanding of the area. There is no crash potential in any conventional sense.

No, I understand that. Clearly if I have £100k in the stock market and it drops 50% in a crash, then there is a good chance my individual investments probably have dropped around a similar amount, almost overnight.

So, p2p wont have the same hit overnight as such. However, what happens when there is a crash and a recession. The economy goes down, money is less available, jobs are lost, defaults on loans, mortgages etc etc. Are you saying p2p is immune to that?

jamesd wrote: »

Instead the biggest risk is a major fraud loss at a P2P platform company and that's kept below the stork market downturn risk potential by diversifying between platforms as well as borrowers.

That's where I sense a paradox. As you say, diversification between platforms minimises your risk. However, you say you are putting more than 75% into p2p, which suggests the opposite to diversification!

jamesd wrote: »

Your recollection is right but not your implication that P2P is illiquid and not available to pay off cards when desired. Most of the interesting P2P is very liquid and I'd expect with say £200k invested to be able to extract £50k and have it in my own bank account within a day at the moment.

Well if you got that covered that's cool as .... clearly, a month of credit card interest on £50k would be painful.

jamesd

P2P isn't entirely immune from the effects of a recession. The potential negative effects and their duration vary depending on the specifics of the type of P2P involved, though.

I rather like P2P backed by pawned items and businesses lending to poor credit consumers, for example, because those businesses have good potential in a downturn. At the far other end there are items pawned by those looking to do things like expand art or classic car collections which have a good deal of protection but for the opposite reason, plenty of money.

Then there's all the property development lending. Some of that is commercial, some residential. The residential often involves finding a buyer and that could be slower or at a lower price if there's a lending cut-back.

On the lending to consumers front some will lose jobs and be negatively affected, others less so. How the particular P2P is affected depends on the borrower selection. Unfortunately I know of no UK P2P firm that now offers pure unsecured consumer lending, both Zopa and RateSetter having exited the pure consumer lending markets and now always combining them with loans to businesses.

More than 75% in P2P is no more the opposite of diversification than putting more than 75% into equities. Just means diversifying amongst asset classes and providers within P2P, much as with shares.

The card deals have staggered expiration dates so it won't ever be all £50k coming due at the same time.

masonic

saver861 wrote: »

Clearly if I have £100k in the stock market and it drops 50% in a crash, then there is a good chance my individual investments probably have dropped around a similar amount, almost overnight.

So, p2p wont have the same hit overnight as such. However, what happens when there is a crash and a recession. The economy goes down, money is less available, jobs are lost, defaults on loans, mortgages etc etc. Are you saying p2p is immune to that?

It is inevitable that there will be another crash and recession at some point and that it will impact P2P, so it is interesting to think through what might happen. These sort of events come along from time to time.

So, your P2P investments could go along happily generating double digit returns and at some point there is a black swan event and lots of your loans start defaulting. Of course, being a discerning P2P investor, you will have sought out the secured loans and diversified with respect to assets backing the loans. So you might have a mix including jewellery, property, classic cars and other high end items, and business assets/capital equipment.

In the case of the pawn-style loans (e.g. jewellery), risk of default is already very high and defaults are not that uncommon, but typical LTVs are close to 50% and items are very easy to sell, so in the event of a default, a loss to the investor is quite unlikely. Couple that with the fact that the gold price is likely to spike in a recession and the protection offered by the security is really very good. I don't think you could make a case for a default leading to much, if any, loss for such loans.

Property is more of a risk owing to both devaluation and liquidity risk in a downturn. I would think investors would likely see such assets having to be sold off at firesale prices in some instances. Typical LTVs for property loans are in the 50-70% LTV range. It is not inconceivable that a seller might have to accept somewhat less than that, so they could see a loss of some proportion of their capital. For example, on a 70% LTV loan, where the property only achieved 50% of its valuation price, the investor would lose around 30% of their capital. In a hypothetical extreme situation where half an investor's property loans were subject to that sort of loss, and property made up a third of their P2P lending, then they'd see a loss of 5% that year, taking their overall returns from say 10% to 5%. Of course this is rather different than the 50% loss mentioned above for equities in a severe crash.

The high end items, as already mentioned by jamesd, would probably be affected very little by market conditions for the reasons he mentions.

This leaves the business and capital equipment type of loan, which are a little more variable and at best guess would fall somewhere in between the extremes mentioned above. On one hand there are quite well protected businesses such as those operating wind turbines, who have a guaranteed element of income. On the other hand there are companies leasing or purchasing equipment, which should those particular business sectors be hit hard could become insolvent and whose assets could be sold off at rock-bottom prices. So perhaps defaults on this type of loan could take your returns from the year, already having taken the hit from property, from 5% down to 0%.

Of course, I'm just speculating here, and perhaps I haven't been quite pessimistic enough. Maybe losses in such a situation could wipe out more than just one year's returns. But it seems to me that loss-potential in a downturn is much lower than for equities.