How to build a solid Peer to Peer portfolio that minimises risks in turbulent times
In times of great upheaval and uncertainty, many people’s focus is naturally first and foremost on the health and safety of their friends and family.But these times also offer the opportunity to assess your financial future, ensure that you are secure in case of future crises and build up a monetary safety net.
Many investors are worried about their financial prospects, having lost large amounts on stockmarkets decimated by the fallout of the CoVid-19 global health crisis.
The Peer to Peer (P2P) sector has faced similar challenges, with investors wondering whether this is a good time to withdraw all their investments, do the opposite and invest even more, or simply double-down and leave any investments where they are until a post-crisis financial state becomes clearer.
Those who chose to withdraw their money have found themselves left with very few other options. Stocks are still too unreliable and will remain so for the foreseeable future. Bank deposits may offer security, but with many central banks dropping interest rates in the face of the crisis, they offer very little in the form of returns.
According to Maxim Pashchenko, President & Founder of P2P platform Nibble, part of IT Smart Finance: «Regardless of how uncertain the future looks, it remains very possible to generate excellent returns through Peer to Peer investing, with none of the downsides associated with the equities market.»
«The secret is in understanding which type of investments present a good opportunity and are more secure and, as always, to focus on diversification in order to spread risk,» he says.
Types of loans that present the biggest risk
When you choose to invest in P2P loans, there are many options for loan types. In the current climate, some of these present a much riskier proposition than others.
Loans for undeveloped land
There is general consensus that the property market will suffer from the current crisis and that property prices will fall significantly. With the construction industry in many countries also brought to halt, lending against undeveloped land presents a huge risk as a 20% fall in real estate prices can lead to as much as a 75% reduction in the value of land.
Loans to small businesses
These are particularly problematic if the loans are unsecured. The small business sector is expected to take years to recover, especially the hospitality and travel sectors. While governments may bail out these enterprises in some countries, the ability to repay a loan rests on continued income generation.
Loans issued by weak loan originators
Many P2P platforms have taken an «everyone is welcome» approach to their selection criteria for loan originators over the last few years, and there is an expectation that this will now come back to bite investors.
Types of loans that present a good investment
Some loan types remain reliable, regardless of the macro-economic situation.
Loans secured by real estate
While property prices will drop and defaults are expected to increase, loans secured with residential real estate, in particular, should be safe. As long as the loan features a first rank mortgage and the Loan to Value ratio is low enough, investors should receive their money back. Loans on business premises present a higher risk.
Loans in countries that deal with the crisis quickly
While a country like Spain was amongst the hardest hit by the crisis initially, their stringent safety measures and quick reaction to the challenge will also see them emerge from it sooner than the rest of the world. Investing in personal loans in a country that is about to restart its economy is a very good idea. The other great benefit of P2P investing is the fact that you can invest almost anywhere in the world, so choosing countries that are less affected by the crisis is easy and logical.
Loans from profitable and responsible originators
Loan platforms that have a strong balance sheet are more likely to be able to honour their buyback guarantees over the next period. In particular, where loan platforms and originators form part of the same financial group or structure and have a strong credit scoring methodology, investors will weather the storm well.
Diversification remains key
By choosing investments from the lower risk loan types and spreading your capital across a range of loans, platforms and focussing on a clever geographic spread, P2P investing can remain immensely profitable even in these strange times.