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P2P Lending to “Beat” Other Investments Over 10 Years
Zopa, one of the safest P2P lending companies and the oldest in the world, has given the vast majority of its lenders higher returns over the past ten years than a large variety of investments, including the stock market and savings accounts, according to its own figures.
And now it says it's going to do it again.
Great returns with low risk
Before taxes, Zopa has paid out an average of 5.7% per year to lenders over the past ten years, turning £5,000 into £8,700, which compares favourably with other investments, including the stock market and savings.
Amazingly, it has achieved this great rate of return despite being low risk.
Zopa has a low 4thWay® Risk Rating of just 12. Eight or less would be something like as low risk as a savings account. The highest score 4thWay® has calculated so far is 50, although I expect much higher scores still when it has calculated for some even higher risk P2P lending websites.
This week at its 10th anniversary party, Giles Andrews, the chief executive officer of Zopa, said to a large group of Zopa lenders, including one of my colleagues, Neil, that Zopa will beat all other investment types over the next ten years too.
That's quite a claim. He was talking about beating savings accounts, the stock market, property, gold and just about everything else.
I think that most investments, gold included, aren't very good ones for the majority of savers and investors. Their records just don't stack up very well on a risk or reward basis.
Four investments over 10 years
However, savings accounts, property and the stock market are excellent choices for many people. (As I wrote in The Investment That's Better than P2P Lending. See end of this article for a link.)
Indeed, they are the other three ways we're referring to when we talk about peer-to-peer lending as the “4thWay” to save and invest. It makes a lot of sense to hold a combination of some or all of those four investments. Each offers satisfactory rewards for the risks you take, provided you stick to simple, sensible strategies.
(See links at the end of this article for simple P2P lending and simple stock-market investing strategies.)
While Giles sounds very confident his business will win again, no one really knows which investment will come out top over the next decade.
But, based on the risk-reward profiles of each of these investments, we can make some pretty good guesses about how the rewards will compare over a typical 10-year period:
Peer-to-peer vs the stock market over 10 years
Stock-market investing should be a big part of most people's savings and investments.
I think you should generally expect that the stock market should offer returns that are somewhat higher than peer-to-peer lending over most ten-year periods, although – usually, and on average – you'll take considerably less risk with P2P lending.
That said, most stock market investors sabotage the majority of their potential stock market returns either by paying high fund management fees, by not shopping around for the best broker or deals, or by buying and selling shares at a rapid rate – paying too many fees in the process.
To add insult to injury, huge numbers of people buy at a high price and sell at a low one!
Also, peer-to-peer lending, at least with the safest P2P lending companies, is likely to produce consistently good returns for all individuals lending their money.
In contrast, the stock market is highly volatile and it's not that unusual to see your wealth shrink when investing in shares for 10 years, or even 20 years. (Read more on that by clicking the link about shares at the end of this article.)
Plus, even if the stock market has a good run, it will see lots of losers, since individual investors' results are very variable. This is not likely to be the case for individuals lending their money in the safest P2P lending companies across lots of loans.
P2P versus property over the next 10 years
Zopa and the other P2P lending companies will find it tough to beat owning your own home. That's because, even if property prices don't rise very much, you'll probably save a fortune in rent. And rent probably will rise!
While I know more than a thing or two about both P2P lending and the stock market, I'm less of an expert on buy-to-let investing. But, I think that skilled buy-to-let landlords could expect to get higher returns than peer-to-peer lending – but with higher risks.
The higher returns and the higher risks of being a landlord are both largely due to borrowing lots of money in order to buy investment properties. Borrowing magnifies your winnings, but can multiply your losses too!
P2P versus savings accounts over 10 years
This one was the easy forecast for Giles: it is astoundingly likely that you'll come out better than with savings accounts if you stick with the safer P2P lending options like Zopa.
That includes cash ISAs, which are tax-free savings accounts.
With savings accounts, it's a real battle merely to preserve your wealth against rising prices.
P2P lending is going to return considerably better than that – even if there's another bad recession during the next ten years.
For a simple, sensible P2P lending strategy see: 4-Step Strategy to Safe Peer-to-Peer Lending.
For a simple, sensible stock-market investing strategy, see: Why I Prefer Shares to Higher-Risk Lending. These)
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.
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