Next in the series of Ask the Investor interviews, we speak with Richard, a 30-year old developer and entrepreneur who has been investing in the P2P market for several years, but with a very passive, hands-off and “lazy” approach (his words, not ours!). Hear about how he started with small investments, grew in confidence, and now invests regularly.
Orca: How long have you been investing in peer to peer lending (P2P)?
Richard: My first experience was with Zopa way back in 2008 in the very early days of P2P – I invested the grand total of £30. Very much testing the water as it was quite a new concept back then and the platforms were pretty young and unproven. Seeing just £30 grow with very few losses increased my confidence and over the years I have continuously added to my portfolio.
Orca: Why did you start investing in P2P?
Richard: It was around this time that I discovered a compound interest calculator – setting it 40 years in the future revealed the huge impact of even a small improvement in savings interest. It was also around this time that savings interest rates started to drop significantly – so naturally I was looking for ways to improve the rates I was getting. Later my savings rates would drop to 0.05%, so any improvement on this was a bonus. The relative safety with provision funds and diversification easily mitigated the potential risks for me.
Orca: How do you invest and why?
Richard: I don’t find it fun to analyse risks, and I don’t have much time to spend selecting investments – I generally treat P2P as a “better savings account” (albeit with increased risk), so I like to be lazy and stick with automatically diversified products, ideally exposing no more than 1-2% to any one borrower. I have a mixture of lower risk, medium and higher risk products such as Zopa, RateSetter and Funding Circle. Funding Circle is good in that you can support businesses while getting good returns, but in doing so I have experienced quite a few defaults – if you’re unlucky, your returns can be quite a bit lower than expected.
Orca: What’s your P2P strategy and why?
Richard: I go for a balance, with some products targeted more for short term savings and some for long term growth. With the Innovative Finance ISA I have set up a longer term product through RateSetter and hope to benefit from that in many years. Over time I’ll invest a regular amount just as I would with a savings account – while keeping an eye on the performance and adjusting if need be.
Orca: What sort of things do you look for in a P2P lending platform/product?
Richard: Track record is a big bonus for me – so I’m not too keen on the smaller and newer platforms personally, but I will sometimes test the water with a small investment to see how they perform. A healthy provision fund is a big bonus as it adds some level of comfort to the investments.
Orca: When conducting research, what are the main resources you use and why?
Richard: Typically, I will do some basic research – I’m not qualified to do anything particularly in depth, but I’ll use Google to see the general perception and background of the platform, and compare similar products. I do consider the withdrawal fees and the provision fund if there is one, as well as reviews (taken with a pinch of salt, of course). I’ll use resources like Orca to gain some more data-driven insights and good quality information, but I definitely don’t go into much depth with research, which maybe I should do, but it can be very time-consuming sifting through the information. So far, I’ve had pretty good results through light research, testing the water and adding more over time.
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Orca: Do you have concerns about the P2P lending market – now and/or in the future?
Richard: I don’t have any concerns personally – but it is interesting to see the big banks moving into the space and investing in the platforms. I wonder if this will eventually lead to the returns dropping and the real essence of P2P being eroded. When I first joined Zopa, the image was almost that you were lending to a friend, so they could buy their first car, but I don’t see this sort of story told as much these days. I haven’t had any bad experiences so far that would put me off continuing to invest.
Orca: How would you like to see the market evolve?
Richard: I think more products which make investing simpler, but with the confidence that my money is relatively secure (never guaranteed, of course). For example, Orca, which has helped me diversify across the market with pretty much no effort required has been a very valuable addition to my P2P portfolio. Taking the research out of my hands, knowing it’s come from a source I’ve used previously, gives me a lot of comfort. More of this would be good.
Orca: Who do you see P2P lending appealing to most?
Richard: From my perspective, I would say P2P appeals to 25-35+ range, but really anyone who wants a bit more return on their money could be interested. The good thing with P2P is there’s a wide range of products available, depending on your risk tolerance and the amount of involvement you want. It’s also very interesting that you can invest in specific industries, for example you can get exposure to the property market even if you haven’t got the time or capital to get your own buy-to-let.
Orca: Why do you think P2P hasn’t hit the mainstream yet?
Richard: For the majority of people I’ve spoken to who know about P2P, the perceived risks have held them back from trying it out. For those with a low risk appetite, I have found that the phrase “your capital is at risk” is a scary one and they have visions of losing their hard-earned savings. For me the choice is easy – face a small risk of loss through P2P, or face a guaranteed erosion of your savings through inflation. I’d say the latter is what people should really be worried about!
Orca: What advice would you give to a first-time investor in P2P?
Richard: Obviously do some research, get comfortable with the market, the various products, and most importantly the risks. But don’t be afraid to test the waters, monitor the performance of your investments and increase deposits over time. It depends on your risk tolerance, but certainly this is how I did it and I’m happy with the performance of my P2P portfolio so far. Without being obviously bias, a provider like Orca has removed a lot of hassle for me! But still, shop around.
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Risk warning: Peer to peer lending is not covered by the Financial Services Compensation Scheme (FSCS), your capital and interest are at risk.