You do not have the time to finish to write about ‘a legit Go&Grow‘ that you find it on Seedrs…or not?
Loanpad is a new UK p2p platform that aims to offer the operational simplicity and control of an online account combined with the higher yields typical of p2p. You can choose between two type of accounts:
Too good to be true? I will explain why I think so. There is a big demand for this type of ‘dream product’ out there (high yield and low volatility) and it makes sense that entrepreneurs try to satisfy this demand; unfortunately, it makes less sense for investors to chase this dream. I already wrote in the past my opinion about Bondora Go&Grow and some of the investment options at DoFinance; Mintos tried a solution similar to Go&Grow and then changed it into the current Mintos Strategies because, unsurprisingly, they had issues cashing investors out.
Someone smarter than me should find a name to define this type of investments: you are not comfortable enough to speculate, i.e. you want a guarantee on your principal, but at the same time you feel bad knowing that your savings sit on an account earning 0% (or even less than that if you live in Europe or Switzerland). After the dot.com crisis, with investors bearing scars of the decline in the stock market, many asset managers started to offer long term investment solutions that guaranteed your capital and gave you some participation if the stock market went up; it was the perfect commercial reaction to the psychological state of mind of investors. Something similar might be at play here: after years of gains in everything, from stocks to bonds, from crypto to real estate, I think that even the most conservative saver is asking himself why he did not participate to the party.
The issue here is not that 3% of 4% return. You can get even more with a simple portfolio at Moneyfarm or any other robo-advisor. The issue is investors aversion to volatility: you want that 3% as a straight line into the future, with no ups or downs. Here is how Morgan Housel puts it in his book The Psychology of Money:
The price of investing success in not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good. It feels like a fine for doing something wrong. And while people are generally fine with paying fees, fines are supposed to be avoided. You are supposed to make decisions that preempt and avoid fines. The natural response for anyone who watches their wealth decline and views that drop as a fine is to avoid future fines.
It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favour.
…
Market returns are never free and never will be. They demand you pay a price, like any other product. You are not forced to pay this fee, just like you are not forced to go to Disneyland. You can go to the local county fair or stay at home for free. You might still have a good time. But you will usually get what you pay for. Same with markets. The volatility / uncertainty fee – the price of returns – is the cost of admission to get returns greater than low-fee parks like cash and bonds.
The usual formula associated to speculative investments is “use only money you are comfortable to lose”, but this product is clearly not offered with that purpose in mind. This is a low-risk / high-yield alternative to your current account, a place where to park cash for short term saving goals like holidays of buying a car. But is going to deliver on this? I see some issues.
Security
I am not sure what guarantee will bring you the fact that they are regulated by the FCA. It is definitely better than nothing, but I consider it more like an entry level feature than a conclusive solution. For example when Lendy went into administration, the FCA was able to appoint an administrator to manage the platform default and try to recover some funds for its investors. This means a smoother recovery if Lendy plan was legit but it will have no recourse in case Lendy was investing the funds in shady projects. There are plenty of cases where the involvement of regulators, credit rating agencies and prominent audit firms did not offer enough protection for investors. Greensill bank, to take the latest case, was regulated by the German banking watchdog and we know how it ended. The day the regulator finds anything wrong…is a day too late for the investors to take actions. The best case for the FCA involvement is to maybe recover 50/60% of your investment instead of zilch (the administrator has to be paid as well out of the creditors pockets) and doing it in a not-so-slow way. Please remember that current accounts in UK are protected by the FSCS up to £85k: this is the level of security your are giving up. Which brings us to the next point…
Compounding
Let’s assume you are using this product for a short term goal; anyway, if it was for something more medium – long term, I would not see the need to have daily access to your cash…no? I will use Marcus, the online retail bank of Goldman Sachs, as a benchmark offering a 0.5% return to its investors. If you invest £5k in Loanpad instead of Marcus, at the end of one year you will have 125 quid more, is it worth the risk? If you assume that the FCA protection will give you a 80% recovery rate in case of Loanpad defaulting, you will have a better expect return investing in Loanpad if it’s default probability is lower than 11%. How does it feel 11% default risk for a start-up? Reducing the recovery rate will require an even lower default probability to justify the additional return, or to put it in a better way, would you play Russian roulette with your holiday to get back such a small return? (I used 5k for the example but more realistically the amounts invested will be lower, I hope you do not think to park here the 20% down-payment for your future apartment).
A 2.5% increase in returns represent a huge amount if you invest for 10 or more years, when you let compounding do its miracle; over a single year, the benefit is way lower. If your horizon is longer, then the comparison is between Loanpad 3% or 4% and what you can get from a 60/40 portfolio or even a 100% stock allocation. True, there might be a scenario where after 5 years Loanpad demonstrated to be a legit platform and the stock market is in a nasty drawdown, but what is the added likelihood that you will need your funds exactly when the stock market is lingering at the bottom? Given the relative low return, in the long term scenario you would want to invest a meaningful amount in Loanpad. But that’s what makes the product so challenging, because the risk here is usually binary, one day everything is fine and the next day you got wiped out. No middle way. With a p2p platform that offers 10%+ returns, you can generate the same amount of profit with a third of the capital at risk.
Liquidity
You leave a cash balance on your current account because you know you might need it, you are just not sure when. Daily access at Loanpad also comes with the “*” : all fine as long as there is another investor to bail you out, otherwise please join the que. This is why I have an hard time understanding Go&Grow marketing material:
If you are saving for an holiday or to buy a car, you are pretty sure when you will need the money. Are you fine to delay your holiday for two months because, sorry, Bondora gated redemptions?
Loanpad decided to invest in loans backed by real estate because they are less risky that consumer loans, fine. But the advantage of consumer loans, or any amortising loan, is that they generate more liquidity because they repay a part of the principal along interest during the life of the loan. Loanpad correctly realised you can divide your loan portfolio in ‘tranches’ to distribute only part of the risk (and profit) to investors:
You can apply the same logic to a riskier portfolio of consumer loans (obviously in the above example Lending Partners and Borrower equity will have to cover a bigger percentage) but add the benefit of enhanced liquidity profile. You can also originate consumer loans with maturities shorter than a year, whereas it is really hard to achieve the same in the RE world.
CONCLUSION
Loanpad is an interesting product but for all above reasons I think is falling short of delivering on its objectives. I would not allocate any emergency savings to an investment that I am not 100% sure will be liquid the moment I need those funds (in case you didn’t noticed, there is a pretty high correlation between unemployment rates and distress in financial markets). And I do not think that the added ‘liquidity’ and partial seniority is enough to justify to get half of the 7% I can get investing in Kuflink; but I have to admit this second point is more personal and I see people out there having different preferences than mine. (gun to my head I will take this over Go&Grow).
Bonus Section
I spent God knows how many hours reading about NFTs in the last few months and this is by far the best definition I found. The only problem is that was written by an Italian author:
Si chiamano NFT, non-fungible token, e sono l’utopia concretizzata di ciò che l’uomo cerca di realizzare da migliaia di anni: avvicinarsi il più possibile alla salvifica sensazione di un cane che piscia per affermare il confine dei propri territori.
Google translate is quite good at the job, promise you will not be disappointed.
What I am reading now:
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