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I Hope You Stress Test Better Than The Banks

The Bank of England is asking the UK's biggest banks and building society to perform stress tests again.

Like last year, the tests are not as extreme as the events of 2008-10. The argument is that that period was seen as a rare event that only happens once in umpt-hundred years.

Yet it doesn't take that long between two such events when people, businesses and the government are swimming in extraordinary amounts of debt. The (highly-connected) world over.

Ignoring the elephant in the room

If the banks were to carry out stress tests as severe as that recent financial crisis and Great Recession, it would reveal something of the scale of the calamity that might well unfold again soon. That would cause some unrest in financial, investment and big business circles.

It's the central bank's job to keep things calm and stable. And less-than-prudent stress tests seems to be part of that. In other words they play down and talk down the risks.

I think that talking something down is a form of not talking straight and, that to me, is lying.

So part of their job, effectively, is to lie to investors, so that we don't sell everything, pushing the stock market and other market prices right down. (Along with their own fat pensions, I guess, or am I being too cynical?)

Prepare to ride that elephant

But as investors, it's our job to take our own view, to be realistic, and to prepare for the worst.

Like almost all of the greatest investors of the 20th and early part of the 21st century, we need to invest with a huge margin of safety only. When we can't find that large margin, we should move our cash elsewhere.

Our calculated 4thWay® Risk Ratings assume that a major calamity of 2008-10 levels will occur while you're lending your money over a five-year period. Despite that, the top P2P lending companies still come out looking very well, provided you spread your money around.

We also do some simple stress testing and we encourage you to do the same. “Simple” in investing is a very positive word, not negative. If you try to be too clever you get lost. Just imagine a dreadful scenario of huge house price falls and massively multiplied bad debts, and you've got yourself a fair rough test.

To get you started, here are some of our own stress tests:

Why Wellesley & Co. is Safe Even During a Crash.

How Much You'll Lose If Zopa's Provision Fund Fails.

Landbay also did a fairly darn severe stress test of its own: Landbay Survives Severe Property Crash Stress Test.

4thWay® Risk Ratings: no risk-rating system is ever perfect and they cannot consider all factors and future events. Read more about the 4thWay® Risk Ratings.

*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Wellesley and Landbay, and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.

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