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P2P Lending Beats The Stock Market, Yet Again, In 2023
Last year, in 2023, if you invested in one of the cheapest and best share funds to cover the entire UK stock market, through Vanguard, and you did it directly through them in their own ISA, you'll probably have made around 6.8%.
That's assuming you reinvested your share of the £90 billion in dividend income that the UK's companies paid out last year back into your fund.
It's also after all Vanguard's fees and expenses (including hidden costs) for your ISA wrapper and the shares within it, which will likely have come to less than 0.25% of your pot.
Most share investors won't have been that lucky. The main reason is most people still pay far higher costs than with Vanguard direct, and higher costs have been definitively shown in countless dozens of studies over the decades to lower your returns.
So the “average” person probably got somewhere under 5.8% from the stock market last year.
P2P lending wins again
Now there is still no official, comparable performance index for P2P lending. But 4thWay probably gets more data than anyone else in this industry and, from all that, I'm confident that the average returns were over 8% after costs and fees. This is still likely to be the case even when considering platforms that closed down.
Normally, it's not that close a call where I need to play the card that “we have all of this data”. The difference between the annual performance of the stock market and P2P lending is usually so much larger that it's completely obvious which has performed better in a given year.
Looking back, overall returns are better in P2P lending
If you had invested in 2005 in both shares and in P2P lending, after costs and losses, you'd probably have made more money in P2P. You'd have made in the region of 5%-7.5% per year.
In shares, after costs, you'd probably have made something like 4%-6% per annum.
So that means an initial stock-market pot of £10,000 would be roughly up to £30,000 by now, while it would be up to £40,000 on your initial P2P lending.
How does their volatility compare?
Since P2P lending started in 2005, UK stock-market investors have typically lost money after costs in 1/3 of those 19 years! That's before even taking inflation into account.
Now, the stock market is proven to be a truly excellent place to invest if you have very long investing horizons, a sensible strategy and strong nerves during crashes. I'm still a big fan of share investing.
But, with each passing year, more investors and financial advisors are cottoning on to diversifying into stable P2P lending:
Indeed, the P2P lending industry has also only had one year where returns were lower than inflation, and that was in 2022. Where just about everything lost to inflation.
It goes to show that it's long past the point where investors should see a big place for P2P lending in their investing portfolios.
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
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Sources: Vanguard; investing.com; Morningstar