Why P2P Lending Should Be A Sizeable Part Of Your Retirement Planning

Has P2P lending outperformed long-run returns from the stock market, and with more stability?

Where to look for information on shares

I'd like to start by crediting the research on shares – and bonds – by Credit Suisse and the London Business School.

If you can get hold of the Credit Suisse Global Investment Returns Yearbooks (and Sourcebooks), I urge you to do so. They contain, without a doubt, by a long margin, the best research on long-run returns in bonds and shares that you'll find anywhere.

The effort that the researchers go through to remove biases, such as survivorship bias, and to ensure their figures are as complete and accurate as possible, is second-to-none.

Shares clearly perform exceptionally well

The 2021 version of the yearbook came out recently with hundreds of pages of interesting details.

Since 1900, shares have given investors an average return of 5.4% after inflation. That's impressive.

Bonds have done atrociously in comparison, making 1% per year if lending to the government and 2% per year if lending to businesses, after inflation.

If you can't get a copy of the Credit Suisse report, I've found a summary of this in an FT article by Martin Wolf and Credit Suisse has its own summary.

There's a substantial “but…”

Credit Suisse's headline figures do not take into account the costs of investing, other than inflation.

Most people in the UK still invest in shares using investment funds that are actively managed, meaning managers try their best to beat the stock market. Morningstar finds these fund charges are now averaging 1.07%, but that doesn't include other costs.

On top of the headline costs, you have to pay the transaction costs. This is when the fund buys and sells shares on your behalf. Transaction costs currently average 0.19%, according to TrustNet.

It's still difficult to get details of the other costs paid by investors to funds over and above those I've already mentioned. Thankfully, most funds don't charge performance bonuses, which can be extraordinarily expensive. But there are usually some other small costs, which can add around 0.30%.

On top of this, you have the costs of your chosen wrapper, meaning the account you use to hold your investments in. This might be a share ISA, for example. Let's say that these typically have a main charge of another 0.40%. (That's less than the headline charge by the popular Hargreaves Lansdown Share ISA.) However, the variety of charges you'll pay to wrappers in different circumstances means that it could easily exceed this.

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So total typical costs for share investors are 1.96% per year.

Research from European Securities and Markets Authority shows that costs don't vary much, regardless of investment performance in a given year.

What's the bottom line? Using the costs of investing today, the long-run returns for investing in shares therefore fall from 5.4% to 3.44%.

I assure you this is still very attractive and compares extremely well versus other investments. Especially as it's after inflation and most people can expect to lose money after inflation in savings accounts. Still, it's not a life-changing result, except perhaps after slowly, steadily building a pot for retirement.


Before I get back to P2P – one thing to boost your share returns!

For investors who want to outperform share fund managers in all market conditions, passive funds have built an incredible and indeed unimpeachable record. These funds – also called trackers – track markets as closely as possible. Since this is cheaper than doing detailed analysis of individual share opportunities and charging for that skill, the cost savings have led to better overall performance.

Despite regular articles on many investing and fund-comparison sites suggesting that we should switch to active funds in troublesome times, the data does not support that idea in any downturn over the past few decades. Passive funds have always done better.

Passive funds have typically charged 0.23% in headline fees when focusing on shares in large companies, according to Morningstar. Those fees are even slightly lower when a fund focuses on medium-sized companies.

Typically, the other costs of the fund are also lower, so you can sometimes get the total costs under 1%, all in. This means you might have got more like 4.4% per year. That's a nice little booster.

What's the downside to shares?

The stock market is an excellent way to invest, but it's volatile and much more long term.

I'm pretty sure most of us didn't start investing in the year 1900, which means that we can easily put our money in at a peak.

An earlier version of the Credit Suisse Global Investment Returns Yearbook showed this volatility very well. Indeed – when we assume average investing costs taken above – it showed that investors can even sometimes make a loss when investing for as long as 40 years.

Certainly, it makes a complete mockery of the idea that “you should invest for at least five years”, which is common wisdom. (To use the word “wisdom” very broadly.)

To improve your chances, you should invest for at least 10 years but preferably 20. This should cover you from most risks, especially if you drip the same amount of money in, month in, month out, to make sure you're buying more shares in the dips.

Why to add a lot of P2P lending to your retirement plans

There have been a lot of stock-market downturns since 1900. These falls lead to losses for many investors, even if temporarily.

The P2P lending market is remarkably different. You can't always buy and sell in an instant, but you also don't have the rockiness.

For example, I wrote a piece earlier this week about reserve funds. I mentioned three prominent P2P lending platforms that had well over 100,000 lending accounts protected by reserve funds. No-one lost has lost money in any of those accounts.

How many people in 100,000 lost money on the stock market during the same period of time, I wonder? Since the P2P lending industry started in 2005, one-in-three years has been a down year for stock-market investors, after costs.

Meanwhile, the P2P lending industry hasn't had a single down year, even though it has gone through the Great Recession (okay, it was just Zopa back then). And even though it has gone through the pandemic recession. The full impact of that one hasn't yet played out, but the detailed data we receive from platforms is showing fantastic resilience that so far is better than our conservative forecasts.

Investors in P2P who have focused on the easy-to-use accounts that spread your money widely have easily earned around 4% or more every year.

For those who have made a bit more effort, returns can be 6% to 8% after bad debts. If you have spread your money widely in half-a-dozen lending accounts that provide sufficient information to assess the risks, it's not plausible that you could have lost money overall.

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Clearly, with steady returns of 4% or more after bad debts, P2P lending adds great stability to your retirement pot, while also potentially boosting your returns compared to just investing in the stock market, depending on how much effort you make – and when you started investing in the stock market.


If you enjoyed that, here's some related further reading:

Peer-to-Peer Lending Vs Other Investments.

The Investment That's Better Than P2P Lending.

7 Reasons To Put Half Your Savings In P2P Lending.

Peer-to-Peer Lending vs Bonds.

External articles mentioned above:

Equities Are The Only Sensible Foundation For Private Pensions.

Credit Suisse Global Investment Returns Yearbook 2021 – Press Release.

How Far Have Fund Fees Fallen?

The Sectors That Are Costing Investors The Most In Management, Transaction And Performance Fees.

ESMA Annual Statistical Report: Performance And Costs Of Retail Investment Products In The EU.

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