What % do you put into P2P ?

Rollinghome

masonic wrote: »

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.

Isn't the difference that when equities fall in value there isn't a loss unless it's crystallised? Even those who invested in well diversified equities at the peak of 2007 wouldn't have suffered a loss if they'd waited for valuations to recover. Invest in a loan that isn't repaid and you have no choice on whether to crystallise the loss: money not repaid is gone forever.

bigadaj

Rollinghome wrote: »

Isn't the difference that when equities fall in value there isn't a loss unless it's crystallised? Even those who invested in well diversified equities at the peak of 2007 wouldn't have suffered a loss if they'd waited for valuations to recover. Invest in a loan that isn't repaid and you have no choice on whether to crystallise the loss: money not repaid is gone forever.

It's no different to equities and is simply an issue with diversification. Single companies go bust all the time, their equity holding is wiped out with no opportunity to recover, so you are reliant on either investing in a fund or diversifying such that you hold a portfolio of stocks.

Similarly companies effectively go bust and are either bought up or the parts sold off, no different to the p2p approach.

Always compare like with like.

Rollinghome

bigadaj wrote: »

It's no different to equities and is simply an issue with diversification. Single companies go bust all the time, their equity holding is wiped out with no opportunity to recover, so you are reliant on either investing in a fund or diversifying such that you hold a portfolio of stocks.

Similarly companies effectively go bust and are either bought up or the parts sold off, no different to the p2p approach.

Always compare like with like.

I'd agree that comparing listed equities in general with loans, to what will most often be to very small unlisted and start-up companies and to individuals, isn't likely to be comparing like with like, if that's the point you're making.

Yes it is an issue of diversification, and also of choice, but far easier to obtain very wide diversification using collective investments than from loans on a limited number of platforms. I'd expect a smaller percentage of major companies going bust than the sort of loans that are arranged at above 12% going unpaid.

With equities it's also possible to choose whether to invest in very large stable companies that are well documented and with low risk of ever going bust, or to diversify into riskier areas. I'd suggest there's unlikely to be that breadth of risk on offer on any p2p platform especially at the low risk end. Put it this way, I could pick, or have a fund manager do it for me, a dozen (or ten dozen) companies that I'd be reasonably confident of not going bust in the next 12 months. I'd be less certain of picking a dozen borrowers needing to borrow at north of 12% that would not default.

masonic

Rollinghome wrote: »

Yes it is an issue of diversification, and also of choice, but far easier to obtain very wide diversification using collective investments than from loans on a limited number of platforms. I'd expect a smaller percentage of major companies going bust than the sort of loans that are arranged at above 12% going unpaid.

I'd agree it is much harder work obtaining sufficient diversification in the P2P markets than the stockmarket, but of course most of those investing in P2P aren't choosing one or the other, but rather are looking for exposure to both asset classes. Your point about the disproportionate amount of reading required to maintain a P2P portfolio earlier in the thread was also well made. There is certainly a lot more work involved in direct P2P investing than there is choosing a few funds, then coming back perhaps once a year to give them a quick review and rebalance. I can understand someone being put off by the amount of effort required.

A stock will tend to have a much lower probability of going into default than a P2P loan, but the consequences of the former are likely to be far more extreme than the latter. It all depends on the loan security, of course, which is to some extent more important than the profile of the borrower.

With equities it's also possible to choose whether to invest in very large stable companies that are well documented and with low risk of ever going bust, or to diversify into riskier areas. I'd suggest there's unlikely to be that breadth of risk on offer on any p2p platform especially at the low risk end. Put it this way, I could pick, or have a fund manager do it for me, a dozen companies that I'd be reasonably confident of not going bust in the next 12 months. I'd be less certain in picking 12 loans in the 12%+ market than would not default.

For me, the "low risk end" is covered by conventional corporate bonds and other debt instruments. But there is plenty of institutional money chasing those.

Coming back to P2P, if your objective is that every loan you pick must be repaid in full so that you get your full 12% return over the next 12 months, then I'd agree with you. But you wouldn't need the full 12% in order for P2P to represent an attractive investment opportunity. Even if your final return was reduced to 8% or so, that wouldn't look so bad. I think every investor in P2P should expect some number of defaults. It is the nature of the beast.

As I said above, I wouldn't be too surprised if one year I find that all of my returns for that year are wiped out by a series of defaults. It seems plausible that could happen. Perhaps something even worse. But those loans that do not default will generate known returns, which will go some way to compensating for those losses over time.

You made the point earlier about stockmarket falls not being losses unless they are crystallised, but that is only partly true. Shareprices do fall in part owing to sentiment. But they are also driven by intrinsic value. Companies do suffer real losses during economic downturns and may go on suffering for a very long period of time afterwards. Some may never return to their former glory. So while I agree it is sensible to ride out stockmarket volatility, when your shares fall in value, that probably does represent a real loss, even if you choose not to crystallise it at that time. So I'm not really seeing the advantage of being in equities during a downturn vs P2P in that sense.

Thrugelmir

jamesd wrote: »

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.

Hence why investors are chasing yield and the pot of gold offered by P2P.

Rollinghome

masonic wrote: »

I'd agree it is much harder work obtaining sufficient diversification in the P2P markets than the stockmarket, but of course most of those investing in P2P aren't choosing one or the other, but rather are looking for exposure to both asset classes.....

Thanks for your thoughts which are always welcome.

I'm not dismissing p2p completely and consequently have just on £100k invested there - for the moment. To answer the original question, that's a very small proportion of my investments and money that I could lose without too much pain (though not without feeling more than a bit disgruntled). Even so I'll be looking to move it elsewhere as opportunities arise.

I won't go through your post point by point, much of which I'd agree with, but the reasons I'd be unlikely to commit much more are various. One as mentioned is the huge amount of time that I think would be better used elsewhere. Not just checking out the borrowers but checking out and understanding the platforms themselves and, to the limited extent possible, the people behind them.The platforms can be so different as for each to almost be considered different asset classes. I'm investing, not running a business and don't want to work that hard now I'm retired. I'm in London so from time to time can go to the AGMs for my larger equity holdings to see and meet the managers, especially if I have any concerns. To do that for p2p platforms with just a few thousand pounds in each and without the same obligations for disclosure wouldn't make much sense, even if they were held for lenders.

The other point that must concern most lenders is the lack of any significant track record. With equities we have thousands of companies stretching back for more than a century to study and understand what could happen in any number of circumstances. We've a fair understanding of how equities work. We've seen how banks work. In contrast, few of the p2p platforms have been around for more than five years and still less is generally known about the previous track records of their managers. We can only try to assess the possible risks. P2P isn't a secret and higher returns rarely come without higher risk.

I'd really love to believe that the loss potential for p2p was no greater than for equities whether in a downturn or otherwise. If that were the case it would be daft not to invest more there rather than in equities. I'd need to see a lot more water under the bridge before I might be convinced of that. As it is, there's plenty of room for one of Rumsfeld's varieties of unknowns to surprise us.

saver861

masonic wrote: »

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.

Is it comparing like for like though. I know its not that simple but in general terms if you have a number of defaulters then that money is gone for good. Sure, some companies go bust and/or shares never recover to previous highs - most obvious recent example is banks.

Somehow though, albeit speaking from limited knowledge of p2p, I rather take the chance on equities than p2p in a downturn.

With p2p you are depending on the platform staying afloat as well as getting the loans repaid.

Rollinghome wrote: »

I'd really love to believe that the loss potential for p2p was no greater than for equities whether in a downturn or otherwise. If that were the case it would be daft not to invest more there rather than in equities. I'd need to see a lot more water under the bridge before I might be convinced of that. As it is, there's plenty of room for one of Rumsfeld's varieties of unknowns to surprise us.

I think that is the key for many. What are the unknowns of p2p? Nobody saw Lehman Brothers hitting the ditch nor would have ever thought it possible. So, until it happens then thats when the real knowledge will be gained.

Thrugelmir

masonic wrote: »

It all depends on the loan security, of course, which is to some extent more important than the profile of the borrower.

If there was adequate security then the cost of borrowing would be far lower. Profile of the borrower is an important factor as well. As the vast majority depend on key individuals without whom there wouldn't be a business.

Much of what has been written reads as justification for investing in the sector As opposed to understanding the world of business finance.

masonic

saver861 wrote: »

Is it comparing like for like though. I know its not that simple but in general terms if you have a number of defaulters then that money is gone for good. Sure, some companies go bust and/or shares never recover to previous highs - most obvious recent example is banks.

I'm not sure I'd go as far as to say it was comparing like with like, but it seems the most appropriate comparison to make. We are of course talking about two very different asset classes. But it is important to understand that if a secured loan goes into default, investors in that loan can be repaid out of whatever the loan security can be sold for, so the amount of money that is lost and "gone for good" is unlikely to be all of the money invested in the loan, and it may be that nothing is lost. I haven't had any losses yet, so I don't have any personal experience, but others have described one or two of their loans having defaulted and that they were repaid in full. Clearly that won't always happen.

Somehow though, albeit speaking from limited knowledge of p2p, I rather take the chance on equities than p2p in a downturn.

With p2p you are depending on the platform staying afloat as well as getting the loans repaid.

I agree with your second point. I've mentioned earlier in the thread that I see platform risk as being more worrisome than the risk of loan default. It is the main reason why I have a very modest amount invested in P2P.

Thrugelmir wrote: »

If there was adequate security then the cost of borrowing would be far lower. Profile of the borrower is an important factor as well. As the vast majority depend on key individuals without whom there wouldn't be a business.

Pawnbrokers will typically charge a minimum of 3% or more per month (but do not require interest to be paid upfront). Property bridging loans typically cost 1.5% per month from "mainstream providers", which is equivalent to borrowers are being charged on platforms like SavingStream. So I don't think the cost of borrowing is lower outside of the P2P arena for several classes of loan discussed here.

I don't see the borrower being important at all if the loan is secured on a couple of rolex watches at 50% LTV for example. It can be of some reassurance in the case of a high net worth individual who is borrowing against a collection of vintage cars, but perhaps not all that important. Nor does it seem particularly important for a loan secured on a high street shop for the purpose of renovating an upstairs flat. For property development loans, the borrower can be very important if the gross development value is being used in the security valuation, but I tend to avoid those kind of loans since a half-completed project is very unlikely to be adequate security for the loan, even at a low quoted LTV.

In terms of more standard business loans, only one of the platforms I use lists these and the rates are lower. I'm less interested in these loans, because if you strip away things like personal guarantees and trade debtors from the security, there often isn't enough left.

Much of what has been written reads as justification for investing in the sector As opposed to understanding the world of business finance.

Well it probably would read that way because it is essentially my rationale for investing in the sector. And no, I don't have any experience in the world of business finance, but then again, I'm not sure it would be all that relevant to many of the loans I have invested in.

Clearly you do have experience, and you've been consistently disparaging of P2P. I would like to understand why as I'm sure you have some grounds for your pessimism.

bigadaj

Rollinghome wrote: »

Thanks for your thoughts which are always welcome.

I'm not dismissing p2p completely and consequently have just on £100k invested there - for the moment. To answer the original question, that's a very small proportion of my investments and money that I could lose without too much pain (though not without feeling more than a bit disgruntled). Even so I'll be looking to move it elsewhere as opportunities arise.

I won't go through your post point by point, much of which I'd agree with, but the reasons I'd be unlikely to commit much more are various. One as mentioned is the huge amount of time that I think would be better used elsewhere. Not just checking out the borrowers but checking out and understanding the platforms themselves and, to the limited extent possible, the people behind them.The platforms can be so different as for each to almost be considered different asset classes. I'm investing, not running a business and don't want to work that hard now I'm retired. I'm in London so from time to time can go to the AGMs for my larger equity holdings to see and meet the managers, especially if I have any concerns. To do that for p2p platforms with just a few thousand pounds in each and without the same obligations for disclosure wouldn't make much sense, even if they were held for lenders.

The other point that must concern most lenders is the lack of any significant track record. With equities we have thousands of companies stretching back for more than a century to study and understand what could happen in any number of circumstances. We've a fair understanding of how equities work. We've seen how banks work. In contrast, few of the p2p platforms have been around for more than five years and still less is generally known about the previous track records of their managers. We can only try to assess the possible risks. P2P isn't a secret and higher returns rarely come without higher risk.

I'd really love to believe that the loss potential for p2p was no greater than for equities whether in a downturn or otherwise. If that were the case it would be daft not to invest more there rather than in equities. I'd need to see a lot more water under the bridge before I might be convinced of that. As it is, there's plenty of room for one of Rumsfeld's varieties of unknowns to surprise us.

Interesting that you're bearish on the asset class but have committed a six figure to it.

I've only put a few thousand in so far, and wouldn't anticipate going above the low tens of thousands at most, so would still see equities as the vast bulk of my investments.