Navigating a complex market
Stephen Findlay, chief executive of peer-to-peer investment manager BondMason, explains why lending is the new investing
Despite being around for many years, direct lending, which also encompasses peer-to-peer (P2P) lending, has only recently been recognised as a mainstream asset class. The reasons why this market is growing is that investors are able to target attractive returns with lower volatility; downside protection from secured lending; liquidity with access to funds when you want and a diversified portfolio across a range of both lenders and loan types.
Sounds easy enough, but the fly in the ointment is that to do it well requires time and commitment.
The key to navigating the large and complex direct lending market and to make the most out of your investment portfolio is through making informed decisions. There are several fundamental things to consider if you are thinking about direct lending as an addition to your investment portfolio.
Your objectives: Be clear about your objectives and your appetite for risk. Why are you investing? Is it for capital growth or are you looking to invest for income? Think how comfortable you are with risk. Do you consider yourself a more adventurous investor or are you focused on preserving your capital?
Timing: Investing in direct lending can be more effective if you keep your money invested for at least 12 months. Investing is always subject to ups and downs and of course returns aren’t guaranteed. By investing over a longer period, you can give yourself more time to build a diversified portfolio and your returns should benefit from a smoothing of performance.
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Managing risks: It’s crucial to understand the potential pitfalls of your investment. Your capital is at risk and your money is not covered by the FSCS. Understanding such pitfalls will help you mitigate against them properly.
Diversification: Diversification is also an effective tactic. Spreading your funds across different lending partners and different loan types can help you better manage that risk. Equally, when you are choosing your lending platforms check that the team behind the platform has a solid investment or lending background and that the platform is aligned with your interests as an investor.
Loan opportunities: This brings us neatly to the best loan opportunities. A good rule of thumb is to use the RADAR principle: reason, assets, duration, amount, repayment. Looking at all these in turn will help to ensure you are selecting the best loan opportunities available. Auto-bid tools can help save time as you don’t have to manually select loans.
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Investing for Capital Growth or Income: The concept of compounding applies to direct lending in the same way as other investments. As returns accumulate and loans are paid back, you’ll have cash building in your account monthly which is available to withdraw or invest. By re-investing this cash into additional loans, you can continue to build your portfolio. Alternatively, interest earned can be withdrawn and be used to supplement your income. With some platforms, this can be a manual process or may be available on an automated basis either monthly or quarterly.
Taking control: Finally, it’s good to stay pro-active. As the direct lending market continues to evolve it is important to keep up to date with the platforms, new operators entering the market and any changes in performance. Doing this yourself is a suitable option if you have the time available. However, managing a diverse portfolio can be time consuming because of the wide range of loans available and different considerations which need to be made. You may want to think about using a managed direct lending platform as an alternative or as an addition.
As I’ve said, direct lending and P2P lending offer attractive investment options. The key is to make informed decisions around investing in this asset class. In this way, you are preparing yourself fully and mitigating as much as possible against risk.