I was thinking about the pros (or not) of having p2p investments in my portfolio during the recent stock market downturn and recovery, in the end they performed as truly alternatives: meaning it is really hard to say how they performed. Like an investment in a private equity fund, you receive performance updates based on models or estimates, most often with a caveat: do not try to liquidate your position at these prices, because the real ‘bid’ is way lower (when it is even possible to sell!).
I do not want to hide behind the lack of mark-to-market to pretend that everything is fine. It takes time to be able to perform a real valuation of your holdings, more so now that governments around Europe introduced payment holidays for corporate and private borrowers. Economies are re-opening but the risk of a second wave is looming above us: would borrowers be able to sustain it? Would platforms be able to sustain it? It is a really hard problem to solve, I find myself impatience, looking for clues between Dashboards, email updates and payments in transit.
As expected, like during any normal recession, this crisis exposed not well run platforms; I am not talking about scams but classic strains like revenue and confidence losses during uncertain financial times. Within my positions, DoFinance seems to be the one in a more shaky situation, but it is just one platform out of 11 (the others being Twino, Finbee, Iuvo, Viainvest, LinkedFinance, Mintos, Estateguru, Viventor, Fellow Finance, Kuflink); I do not consider Bondora and Funding Circle since I started to wind them down long before the crisis, still their (shitty but positive) performance did not worsen due to recent events. Twino returns were even better! Some investors flew (my take) so the cash drag disappeared and I could finally see all my balance fully invested all the time.
After four decades of falling interest rates, it seems safe investments offering attractive yields have finally disappeared. With Developed Markets Govies yields at all time lows and well below expected inflation for the next decade, I have to necessary re-think the classic 60/40 portfolio if I want to F.I.R.E. one day. Not only Govies yield zero but it is hard to imagine how they could provide a cushion during the next crisis: rates have to go negative, or further negative, for those bond prices to go up. High-quality corporate and municipal bonds offer more generous after-tax income, but hardly enough to excite investors; Emerging Markets Bonds give you a decent yield but they are volatile, maybe not as much as stocks but close enough.
Recent fiscal policy response was good in Europe, UK and US but what will prevent political pressure to use the same tools at next mild recession? The FED was already easing in November 2019, when no one was caring about the virus. Will countries be able to have more and more debt without consequences? If so, base yields will stay down, maybe get even more negative and taking more risk would be the only option. The other possible outcome is that one day a DM country will default on its debt and yields will go up again to reflect real risks. What about inflation? Will there be inflation as we knew it? I doubt, the rich are getting richer and going forward there will be two types of inflations, a high one for scarce items (top universities, well placed houses, frontier healthcare, meat?) and a very small one for commoditised items and services.
It’s time to say goodbye to the notion of a safe yield and confront its many implications: this is when p2p investments come into play. No, I am saying to allocate 40% of your savings there but, while platforms become bigger and safer (hopefully), their a quasi-constant yield can lessen the pain when stocks crash. Instead of the classic balanced portfolio with 60% stocks and 40% bonds, some advisers are suggesting investors should opt for 75% stocks, with the other 25% in cash investments like money market funds and high-yield savings accounts. Starting from this base, each one of us can shift those % and maybe add other investments like p2p.
The cash portion depends on your particular situation. I just bought a flat and I do not have any other big expenditure on the horizon: since I moved to London I do not own a car, I have full medical insurance for my family and my daughter will go to university in 17 years. I am not a real fan of cash as investment unless you are retired but it is a necessary evil if you, as many others, cannot stand to watch your savings (temporary) cut in half every ten years or so. There is nothing wrong; it would be worse to be 100% in stocks and then panic and sell.
P2p investments might have a psychological advantage over stocks because the lack of mark-to-market will protect you from visualising the losses during a recession / downturn. This should help you to stick to your plan when the time gets tough…but considering the recent run from platforms this might work only for other alternative investments. It is always important to consider risk adjusted returns. A newly born platform that lures you with a 20% yield (and maybe a ‘fake’ buyback guarantee) will have a risk adjusted return lower than Mintos, to take an established player as an example, because of the start-up nature of the business. On the other end of the spectrum, and this should not be a surprise if you read my past articles, Bondora Go&Grow does not offer any additional security to pay investors only single digit yields.
Talking about G&G, quick aside to close this post. This is my favourite place to check how many words someone can write instead of admitting “I promote Bondora because the referral fees I get are huge”. After years of praising the product because the incredible virtue of its liquidity (“You can get back all your money in one day!”) I discover that actually during the crisis they had to gate redemptions because…there was no liquidity. In a Lars (von Trier) twist, Lars (the blogger) says that investors should not panic because G&G was never meant to be a liquidity product…so much so that Bondora market it as a way to save towards your holidays or to buy a car. Imagine if you are ready to finally buy your plane ticket and no, sorry you have to wait I do not know how many months because you can only redeem 10 euro per week. Great tool. Even Lars himself (allegedly) say that parks there his business cash; as someone that spent the last sixteen years managing cash for big corporates, I can tell you it is the very wrong way to do it.
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