4thWay’s 10 P2P Investing Principles
This page was last updated on 8 January, 2017
Throughout this site, we call lending, “lending”. Funnily enough.
But that word can sound a bit casual and easy. Like you're giving some chums, some fellow countrypersons or local businesses, a bit of cash in return for a bit of interest. A simple income on the side where everyone's a winner.
Instead, you need to consider that lending is also investing. Investing means taking some – with our help, we hope, careful and controlled – risks with your money.
That's why we call our principles P2P Investing Principles. Just as an extra reminder to you about the diligence that you need to conduct when looking at P2P.
Don't get me wrong, P2P lending is on average a relatively low-risk investment compared to the stock market and it is relatively easy to assess compared to picking shares – provided you arm yourself with knowledge.
But it is still, most definitely, an investment, meaning carelessness, greed, panic, pride and fear can all get the better of us.
With that in mind, here are 4thWay's 10 P2P Investing Principles to choose which P2P lending platforms to lend in (and even individual loans if you want to go down that self-picking route).
These following Principles help guide us, and keep us on sensible and sure footing. They help us all to keep our own desires and worries in check, so that we can still sleep like a baby when the economy is sinking and bad debts are rising.
Principle One. If there's any doubt about lending at all, the answer's “No”. Only lend when you are supremely confident you understand all the risks.
Principle Two. Only lend when you are getting a decent premium over savings accounts and cash ISAs.
Principle Three. Treat buried information as if there's a reason, missing or ambiguous information as if it contains bad news, and decreased information as if it contains worse news. Demand more verifiable information the less that is provided freely.
Principle Four. Spread your money across lots of loans and P2P lending sites, and across other investments too – not just P2P.
Principle Five. If something smells fishy it just well might be. Trust your warning instincts, those little alarms and feelings in your belly. Don't let beguiling interest rates confuse your nose; sniff around for more pleasant smells.
Principle Six. Try your darndest not to prove you're right to invest but to prove yourself wrong. Only that way can you truly get wise and make confident decisions.
Principle Seven. Set your own lines in the sand and only change them when there is an extraordinarily good case backed by all the facts and indicators. Don't move the lines in the sand just because the crowd (including journalists, pundits and experts) say that you should, or because nothing has gone wrong for a very long time. With investments, it is always when the last cynic thinks it is safe – and moves their lines in the sand – that it goes all wrong for them!
Principle Eight. Return of capital (the money you lend) is more important than return on capital (the interest and profits you earn when lending).
Principle Nine. Don't borrow to lend. There might be rare exceptions to this principle, but they will be truly rare.
Principle Ten. Past profits do not mean that future profits are inevitable. Seemingly profitable investments can swiftly turn into bad ones for the unwary, the non-sceptical, the ill-informed and the greedy. Keep re-assessing the risks and don't get attached! Stay single. Think independently.
Suggested further reading: The Five Key Risks In Peer-to-Peer Lending.