P2P: Saving Stream (AKA SavingStream)

Malthusian

jamesd wrote: »

Many people grossly misunderstand and misrepresent the risk of P2P, particularly notable in Malthusian suggesting use of a stock market portfolio instead when the investment horizon is not likely to exceed three years

The investment horizon is not necessarily the lifetime of AnubisHorus' mother. We don't have enough information to say definitively what it is. However if she has enough cash to meet her care fees in the forseeable future (hence why I said at least 2/3rds in cash) then she is running little risk of being forced to encash stockmarket investments at the wrong time.

That is very different from investing all her assets in high-risk corporate lending in order to generate sufficient yield on the capital to pay the care home fees without drawing down the capital.

What she doesn't have time to recover from is a permanent loss due to investing in P2P, if debts go bad and any insurance fund proves insufficient to compensate all the punters.

masonic wrote:

On the subject of due diligence, it really depends on the nature of the loan. Jewellery and other trinkets need very little, perhaps just a check online that the valuation price is sensible

Well in traditional boring due diligence for corporate lending you would also check a) that the jewellery actually exists and isn't a photo copied from eBay, and b) hasn't already been offered as security for half a dozen other loans. All the nitpicking boring checking of stuff that obviously won't happen until it does.

jamesd

Two thirds in cash and one third in equities implies about 2-2.5% nominal return on the £300k available, assuming 5% historic equity returns plus inflation minus costs. I'll use 2.5%. That's £7,500 a year. Some state pension as well, I'll assume £8k. If spending is only £42k care fees that's a planned capital loss of £26,500. That £26,500 is 8.83% of the pot size.

P2P at raw 12% would be paying out £36,000 assuming it's also recovered from defaulted loans. Add the assumed state pension and it's an increase of £2k a year.

So, before unrecovered losses to bad debt the P2P has an advantage if £28,500 a year. Ignoring tax effects which favour P2P it takes unrecovered losses to bad debt of 9.5% of the pot just for P2P to do as badly/well.

I don't think we've yet seen any P2P in the UK that for substantial and decently diversified holdings has managed to do as badly as just breaking even, let alone losing 9.5% of capital after all recovery work. Assuming something so much worse than what has been seen doesn't look like a very viable prospect. Though I wouldn't want to be using Lendy or any single platform, more like five platforms. Not very viable isn't impossible but nor is it the likely outcome or close to being likely.

To put that somewhat differently, I normally write about deducting 2% from raw returns to allow for unrecovered bad debt and you appear to be positing 21.5% deduction from raw returns to match what you described.

I've assumed 0% return from cash because it doesn't change the answer much given that some P2P can be had that pays more than 12% either via raw interest or in trading profit.

JohnRo

Thread title change?

Malthusian

jamesd wrote: »

Two thirds in cash and one third in equities implies about 2-2.5% nominal return on the £300k available, assuming 5% historic equity returns plus inflation minus costs. I'll use 2.5%. That's £7,500 a year. Some state pension as well, I'll assume £8k. If spending is only £42k care fees that's a planned capital loss of £26,500. That £26,500 is 8.83% of the pot size.

P2P at raw 12% would be paying out £36,000 assuming it's also recovered from defaulted loans. Add the assumed state pension and it's an increase of £2k a year.

Returns are the least important consideration here, this is a question of how best to pay an elderly person's care fees.

If there is a catastrophic crash within the next few years, under the first scenario it hardly matters as the mother has enough cash in the bank to pay her care fees for five years. Even if there is a crash at the worst possible time, the chance of her running of out of money in her lifetime is virtually nil.

Under the second it very much does matter as she has no cash in the bank and has whacked it all into high risk corporate lending. If borrowers begin defaulting en masse, the security proves of little value (which is a material risk given no-one is doing due diligence worthy of the name) and insurance funds are insufficient, she will have no income, and no capital as no-one is going to be offering significant money on the secondary markets. Of course, AnubisHorus and his brother have cash of their own they could use to pay her fees... except this is apparently all in high risk P2P as well.

You've clearly looked into P2P exhaustively and you've concluded the scenario I've painted has zero probability. Until we go through a proper 2008-style crash we won't know for sure. It's less the return and volatility that concerns me, more the risk of whacking all of an elderly person's savings into high risk P2P in order to generate sufficient yield to pay her outgoings, when she has no reason to take that level of risk.

masonic

Malthusian wrote: »

Well in traditional boring due diligence for corporate lending you would also check a) that the jewellery actually exists and isn't a photo copied from eBay, and b) hasn't already been offered as security for half a dozen other loans. All the nitpicking boring checking of stuff that obviously won't happen until it does.

That part of the due diligence is tricky for a P2P end investor. In the great majority of cases the identity of the borrower is not revealed in this type of loan and so one has to rely on statements made by the platform operator that they have had the asset independently valued and that it will be securely stored and insured for the duration of the loan. In most cases I'm aware of, the platform will take possession and issue a buy back agreement. There is also a class of loan secured on rolling stock from a jeweller, which is held by the business. In this case, there is some additional risk, as it is contingent on the P2P platform to ensure not only that the stock actually exists and doesn't disappear, but also that items are not replaced with those of lower value over the course of the loan.

AnubisHorus

Hi mother will always have income ie. pensions etc and personal care is free in Scotland so she only has shortfall to home of £1000 a month. We have several times that in free funds from our own pensions. But in your gloom and doom the world has collapsed> The Banks only cover £75000. Never i repeat NEVER
has everything ie. assets lost 100% of their value. Even in crash houase prices only fell large amounts for a short period. Property assets can be rented and get some income. Only assets can protect some value .Take a look at Venezuela 1000% inflatioon. If we get to the state you predict. The money we have in P2P will be the least of our problems. I guress you work for remain campaign as propoganda guru:j

masonic

AnubisHorus wrote: »

The Banks only cover £75000.

The limit is £85,000 per person per financial institution. Not that I think there is much justification for holding six figure sums in cash over the long term.

AnubisHorus

Noe reduced to £75000 as of April ......Sneaky

masonic

AnubisHorus wrote: »

Noe reduced to £75000 as of April ......Sneaky

No, you are wrong. The limit is £85,000 since 30th January 2017.

https://www.fscs.org.uk/what-we-cover/compensation-limits/

AnubisHorus

Thought I saw it was back down :beer: £1000000 temp up to 6 months