Peer-to-peer lending sites: MSE guide discussion

jamesd wrote: »

it's poorly invested for an environment of rising interest rates, so further capital price losses can be expected. Since this is an accumulation fund the interest payments might mask that.

It doesn't look like a good investment choice at the moment. If a bond fund is desired, something with lower average term looks like a better idea.

i disagree.

attempting to predict the direction of interest rates is best avoided, IMHO. nobody really knows. (and although this is an actively managed fund, it may well be that vanguard choose not to take a very active view on the direction of interest rates.)

it is not enough to predict that rates will rise and to be right about that. because that's already in the price: interest rates are expected to rise. you have to predict that rates will rise more than "the market" expects, and be right about that.

because an anticipated rate rise (or rises) can be "in the price", it is not true that bonds will necessarily fall when rates are rising. roughly speaking, bonds will fall if interest rates rise further and faster than is expected. but they will rise if rates rise less far and slower than expected. so bonds can rise when rates are rising.

many people have been predicting more rapidly rising interest rates and falling bond prices for about a decade. and have been wrong for most of that time. sticking to shorter-term bonds has reduced returns.

not sticking to shorter-term bonds is taking a risk (term risk). but on average you are paid something for taking on that risk. there is no reason to avoid this risk completely. you could have too much of it (e.g. all of your portfolio in 30-year gilts). it's best to have a portfolio which is diversified across different kinds of risk. some term risk, mixed with other kinds of risk, can be a good idea.

Of course you have to worry about capital loss and with this fund it looks more likely than not that capital will be lost by those who invest now.

any losses due to rising interest rates are only temporary, providing your holding period is longer than the duration of the bond fund. because the bonds still pay the interest and principle they promised to pay.

Minimal chance of losing all of the capital but if the broker where you hold the fund fails you can be locked in for the duration of the administration and be compelled to take large capital losses from the administration costs, if you hold more than £50,000 of total investments at the broker.

general risks of platform failure (a slight change of topic ) are a lot higher for p2p than for mainstream platforms. this is not just about whether the FSCS applies. also because p2p platforms are generally much smaller and newer; IMHO, few if any p2p platforms could be considered as unlikely to "mislay" assets as the biggest mainstream platforms.