Peer-to-Peer Lending is Better Than Bonds
- Bonds have barely kept up with rising prices, and perhaps not even that.
- Peer-to-peer lending has easily given investors solid real returns.
How good are bonds?
On average, bonds are “a bit naff”, according to the fantastic Credit Suisse Global Investment Returns Yearbooks.
OK, the Credit Suisse funded research doesn't actually say “naff” per se, but it does show it through its figures and graphs.
In 113 years, the real rewards of investing in corporate bonds has not even been to increase your wealth by eight times. Far less than that if you include government bonds.
Shares, on the other hand, would have made you over 300 times richer.
Worse, the Credit Suisse research doesn't consider investing costs. It's not normally free to buy and sell bonds, because there's usually some middleman charging you somewhere.
Even worse, when most of us invest in bonds, we do so through bond funds, so that those of us who aren't rich can more easily spread our risks across more bonds. Funds add an extra layer of annual management charges and expense costs, which further reduces average returns.
After costs, the result is that you're not really likely to do much better than savings accounts and you're going to struggle to protect your wealth from rising prices.
Where exactly is the pay-off for bonds?
Astoundingly, you're not even getting great stability in return for these lower rewards. You can invest in bonds on a monthly basis for well over 30 years and still be poorer in real terms at the end. That is not a one-off incident localised in one country, but an event that has happened many times in many places.
And over the short- or even medium-term, you can make some quite significant losses.
It seems to me that the rewards are more volatile than you deserve considering the meagre potential returns.
Can you be an above average bond investor?
I try to see the positives of bonds, I really do. For example, we're just talking averages here so some people must do a whole lot better. But, with such a record, it's hard to imagine why anyone would invest in lots of bonds regularly.
I think it makes more sense to save and invest where the odds are already stacked in your favour.
I also like to bear in mind that the excellent researchers who write the Credit Suisse report* have the view that bonds smooth out returns for stock-market investors. But this smoothing comes at a very high price.
Peer-to-peer lending is higher risk and higher reward. It's the higher rewards that got me into it, combined with great techniques to manage those risks.
Over the near ten years since P2P began, UK lenders focusing on the safest options could still have easily made real money, even accounting for rising prices. No lenders have lost any money at the safest peer-to-peer lending companies. These lenders have managed their risks with just one or two simple decisions.
10 years is not very long and the future is always different to the past, but the risk-reward profile of lending to consumers, businesses and against property is well-known. Conservative, low-risk lending practices in particular result in relatively few bumps and yet decent returns.
Just as with a good stock-market strategy, you need to focus primarily on controlling and spreading out the risks and then leave the rewards to follow their natural trajectory.
Some people who have lent through P2P complain that 25% of their loans have gone bad. These people are not managing their risks, even though it is made so easy by many of the safest opportunities.
Up the risk, then manage it
You could go for low-risk bonds and hope that you'll manage to get a real positive return, or even a neutral return (so much for “low risk”). But surely it's better to up your risk to something that is likely to give a real positive return, and then manage the risks to greatly increase your odds?
*Credit Suisse Global Investment Returns Yearbooks are written by the London Business School professors Elroy Dimson, Mike Staunton and Paul Marsh. These professors also wrote the investment classic: “Triumph of the Optimists: 101 Years of Global Investment Returns”.
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