Portfolio

Portfolio Management for Peer to Peer Investors

Coming from a stock market-based education, I believe an investor would benefit from applying the same principles of portfolio allocation to peer 2 peer investing.

In the stock market, portfolio management is important because it allows an investor to manage and mitigate several types of risk, in no particular order:

– Liquidity risk (should you need money in a short amount of time)
– Systemic risk (protecting yourself from downturns in that particular market)
– Specificity risk (if one company goes under, you don’t want to lose a large chunk of your investment)

Let’s see how we can apply these principles to a portfolio of peer to peer websites.

Liquidity Risk

Every investor has a certain amount of cashflow that might be needed on a month-to-month basis.
Think of your mortgage, taxes, car payments, insurance payments, et cetera.

The first, most important step here is to have a clear picture of how much money you will need, and when you will need it.

For example, let’s assume you will need 20000 Eur every march, because that’s about the amount you pay in taxes every year.
You will also need 5000 eur in June, for your health insurance, and another 5000E for car payments in August.

Most often, you don’t want to have 30000 lying around earning zero interest, as they actually lose value to inflation every year, at a pace around 2-3% (which means you are losing about 1000E every year).

Now, let’s say you want, instead, to invest those funds into grupeer, fastinvest, Envestio and Mintos.

With a spreadsheet or a simple text note, you will want to time the expiration of your investments, so that you can withdraw 20000E before march, just in time to pay your taxes, another 5000 in June, and the last 5000 in August..

If you cannot find a suitable investment, or you just want to get lazy, you can consider mintos short term loans, with a one-month duration, and then set the “minimum amount of funds” limit to 20000E for a couple of months, so you end up with the full 20k in time for your needs.

A good, balanced approach, would have you invest part of you portfolio in long-term, higher-interest rate loans, and a portion roughly equal to your maximum liquidity limits in one-month loans, that you can quickly turn into liquid cash when the need arises.

Specificity Risk

Most investors get this one roughly right, it’s the classic “diversification” that you find in the stock market.
In stocks people tend to overdo it (you don’t really need two hundred stocks to divesify, statistics easily show that 15-20 are already sufficient to achieve 95% of your diversification needs).

In p2p investing, this is usually harder to do, since there aren’t so many different choices.
In my opinion, you should aim to diversify in a few websites, keeping a close eye on the legitimacy of the team and solvency of the loan originators.

If there are only 4 good websites, there’s no point in “diversifying” into another 10 unknown startups of lower quality.

You probably can’t keep tabs on all of them, and one will end up burning you, taking the cash with them and potentially erasing all your gains from the good p2p lenders.

That’s why in my portfolio I prefer concentrating in 4-5 good companies, such as the ones in my recommended page

Systemic Risk

A very important risk that I haven’t seen anybody mention.

P2P websites are basically concentrated in the individual consumer loan business (e.g. you lend money at high interest rates, to risky individuals that couldn’t get a loan from their bank at better rates.)

Sites like Mintos mitigate this risk by insuring the investor with their buyback guarantee, but as we know from 2008, when a financial crisis hits and everybody defaults at the same time, financial reserves are usually not enough to cover losses.

By all means, p2p websites are risky in an severe economic downturn, because the individual lenders will easily default on their loans, sending default rates higher.
If the company offering buybacks does not have sufficient insurance and reserves to cover these defaults, they will go bankrupt (like it happened with Eurocent on Mintos) and potentially make it difficult for investors to recover their capital.

From a portfolio perspective, this means: do not concentrate all your investments into things that lose value during economic downturns, and consider being under-weight p2p if you see signs that the economy is slowing at a fast pace.

Please bear in mind that economies are very “locally sensitive”, so a booming economy in the UK does not necessarily correlate with a correction in Germany or the US: this means that a nimble investor may be able to re-allocate his loans to different countries in different economic scenarios, to minimize the risk of default on a single loan originator.

Summarizing:

– Make sure you ladder the expiration of your invesments to match your liquidity needs. If you want to get lazy, invest a large portion into single-month loans on mintos, and increase the “minimum amount to keep in the account” at least a month before your liquidity needs

Diversify your p2p investments into a few companies that you find reputable, and that you can keep tabs on. Do not add new companies “just because”, as it’s likely to hurt you in the long run. Do not invest in a single company either, as it’s too concentrated.

Try to keep tabs on the economies of the countries you are investing in, and if you feel nervous about unemployment rates and the general economy in a specific country, consider relocating your loans to different pockets of the world with better economic prospects.

I wish you a richer and happier day, see you soon!

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