Studies of Life

Learning by doing.

The Risks in European P2P Investing: From 20% to 10% and then 5%

18 November 2016 by Jim

(Image by InvestmentZen –

I am an investor in P2P loans in Europe. I started out with Bondora in 2014, and after burning my fingers there, I moved on to seemingly safer alternatives, including Twino, Mintos, ABLRate, SavingsStream, FellowFinance, etc. Many people scared by what happened at Bondora will have made the same journey.

What went wrong with Bondora you might ask? Well, misaligned incentives for one thing, and shoddy management decisions for another. The platforms basically promised 20% ROI per year, which was – with hindsight obviously – excessive. They have since revised this figure. Also, they tried to hide data by changing the way that statistics are displayed on the site constantly. None of that builds trust.1

After leaving Bondora, except for the money that is tied up in loans and that I will have to wait years for, I turned to other platforms, which currently display ROI figures around 10-12% per year. And some of those are asset-backed loan platforms. But the assets that back these loans can loose value, so that is not risk-free either. Some of these platforms offer buyback guarantees, offering to buy back delinquent loans. But that buyback guarantee is only a promise. It can be broken in many different ways: it can be cancelled at some point in a downturn, or the company behind it can simply go bankrupt, which frees it from all obligations.2

The common sense argument

P2P investing so far is pretty risky, even if my current P2P portfolio might look much safer now than it did before. P2P investing has not yet stood the test of time. We don’t yet have lots of people who got rich through P2P lending in the long-term. So caution is necessary. We must not let the juicy returns blind us. There is no free lunch.

If P2P returns are really sustainable and so much higher than equity returns, as they claim to be, then:

  • Why is there no exodus of capital from equities to P2P lending?
  • Why do the owners of P2P companies invest in their P2P company instead of in the loans directly?

The answers are, respectively:

  • Because stockholders – rightly – consider P2P to be too risky because it doesn’t have a long track record yet, unlike stocks.
  • Because the owners are getting a better deal investing in the company than investing in the loans.

Given these facts, it is clear that 1. the P2P market is risky, more so than we currently think, i.e. it is not 10-12% ROI guaranteed. There is hidden risk. And 2. it is in the interest of the company owners to hide that risk because they earn more if more loans are issued, which means they need investors who underestimate the risk.

The 5% rule

In the long-term, real estate, equities and bonds offer annual real return rates of 5-6%. This 5-6% per year figure is the benchmark. And even those 5-6% don’t come without volatility and risk.

The next time you see 10-20% returns advertised somewhere, the simple truth is that there is corresponding risk, which might be invisible at first glance but still very much present. Just because investors want high returns in a yield-starved environment doesn’t magically make that 10% yield appear. So if someone offers 10% return with less risk than stocks, you should notice that something is fishy.

In terms of the bigger picture, this leads me to reduce my current allocation to P2P investments, from around 24% to 20% for now. This basically means: “it might work out in the end, but I don’t bet on it.” It also means I will plan my future finances around a target ROI of 5%, and not more. Generally, we need to keep in mind that it’s not easy to make money out of money. The real return rate we can get anywhere has to be proportional to the risk. If that doesn’t seem to be the case with a particular investment, and the risk / reward ratio seems too good to be true, hold your horses: it probably is too good to be true.

So I’ve learned to be more cautious. And I hope this post will help some of you guys be more cautious, too. It can’t hurt!

  1. My portfolio has lots of high-risk loans from a time when loans were not yet rated based on risk (otherwise who would have bought those, duh) so my situation is not applicable to all investors on Bondora. Some might do fine if they steered clear of these HR loans.
  2. A good article on the topic is here:

2 comments | Categories: Investing, p2p lending | Tags: , , ,

Comments (2)

  1. Frankly I have stayed as far away from p2p investments as possible. In my view their is no way to reasonably assess risk, of either the underlying debt, the platform or its owners and backers.

    For that reason I have always valued the loan return at -100%!

    • “He who doesn’t risk never gets to drink champagne.” 🙂

      On a more serious note, don’t want to seem rude, but for me it seems that you are either living in a bit of illusion or that you are constantly afraid of everything and do not invest in anything at all.

      In my opinion there is no reasonable way to assess risk in any of investment classes – A) you never have complete information, B) you are never able to tell the degree of reliability of the information that you have.

      Therefore, with p2p investments, as with all other investments, you have to be sensible enough not to put all your eggs in one basket and spread the risk as much as possible.

      Besides, adding new investment classes to your portfolio only helps you to achieve better overall diversification, which can never be totally wrong. Of course, unless you invest in obvious scam or pyramid scheme.

      Also, valuing anything at -100% return without any basis for it is just stupid.

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