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Readers’ Q: Do I Need To Invest In Shares If I Do P2P Lending?

Greg, a 4thWay reader, has asked:

“First of all, I must just say how much I've appreciated your website as I've gone about educating myself in the area of investing over the past few months.

“My wife and I have just made our first P2P investment, with more to follow when our house sale goes through in the summer.

“I'm happy that I have a pretty solid grasp of the reasons for spreading my P2P investments across several platforms and, within each platform, across many loans.

However, I do have a lingering question/concern about diversification.

“I'm struggling to see any really solid reason why we should be putting a proportion of our investments into shares when they seem to be a higher-risk product offering a substantially lower and less reliable income in the short to medium term.

“I appreciate that they offer the best prospect of capital growth over the very long term, for investors who are looking for that, but we really are looking for income over the next decade or so and are quite prepared to sacrifice longer-term capital growth to get it.

“There's also the chance that we might want to ‘cash in' our investments in the medium term, which on the face of it makes shares the wrong choice for us since the market could be down at that point. But everywhere I look I see the mantra of ‘diversifying across asset classes is good' repeated.”

4thWay's response:

This is a very good question, thanks.

The very best research on shares that we know of and use at 4thWay comes from three professors working at the London Business School.

They produce the Credit Suisse Global Investment Returns Yearbooks/Sourcebooks. You can get some of those free as pdfs if you search the internet. They also wrote “Triumph of the Optimists”. Their research strips out a lot of the data errors and biases that occur in all other leading national or global research on shares performance.

Looking at their findings, it's clear that the risks of losing to inflation over a ten-year period in shares is considerably higher than most share investors and financial advisors realise, especially when you factor in the costs and fees when investing. You're still more likely to beat inflation than not, but it's far from a given.

The risk profile of peer-to-peer lending over ten years or less looks considerably better, and over five years its even stronger, due to the volatility of the stock market.

I think the article here explains that best: 7 Reasons To Put Half Your Savings In P2P Lending.

So, certainly, the shorter your time horizons, the less attractive it is to invest in shares.

I would point out that right now interest rates in peer-to-peer lending are still, in places, higher than they should be. This is because borrowers have piled in faster than investors, so there's a supply and demand imbalance. Over time, you should expect P2P lending to become less attractive than it is today, although it will remain an excellent opportunity for shorter-term investing.

Read more: Peer-To-Peer Lending Vs Other Investments.

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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