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Post by profunder on Apr 23, 2016 9:24:32 GMT
So this came up in it another thread, but to save taking that off topic I'll start a new thread.
Hypothetically if you had £1m to invest, would you put 10 loans of £100k for 16%, 40 loans of £25k for 14%, or stick to 12% loans and fully diversify your money.
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Post by Deleted on Apr 23, 2016 10:11:03 GMT
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locutus
Member of DD Central
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Post by locutus on Apr 23, 2016 10:27:34 GMT
Where are the investments offering 16%? I know about the one on FS but can someone tell me where I can find nine others?
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Post by profunder on Apr 23, 2016 10:38:05 GMT
Where are the investments offering 16%? I know about the one on FS but can someone tell me where I can find nine others? Others have come up in the past of FS, it practice though you would get a reasonable amount of dead time. I simplified the question to a theoretical one.
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stevio
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Post by stevio on Apr 23, 2016 10:44:55 GMT
If one of your 100k 16% goes bad you lose 100k
If one of your 12% loans goes bad you lose a minuscule amount
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Post by mrclondon on Apr 23, 2016 11:12:55 GMT
I aim for a maximum of 1% of p2p portfolio in a single loan, so with a £1m pot would be looking for £10k slices.
If it was a very low LTV with no obvious risks, I might be tempted to stretch to £25k for a bonus on the occasional loan, but not as a general approach.
This particular question comes about through the specific approach FS have adopted to filling large loans, bonuses which are lost (or reduced) if subsequent sale on the SM is attempted. With a £1m pot those platforms that utilise underwriters in the more conventional sense would be interested in talking, and the underwriter fees and (normally) only short term risk of minimal diversification would I think be a more realistic approach.
Forgetting the divergence of views on the loan that sparked this discussion, commercial property can and does lose 50% or more of its value from the peak of a boom to the trough of a recession. The world is an uncertain place at present, and wouldn't need much to tip the global economy back into recession. An over concentration of assets that are known to perform badly in recessionary times seems to me to be a doubtful application of the quote “Diversification may preserve wealth, but concentration builds wealth”.
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Post by Deleted on Apr 23, 2016 11:51:31 GMT
Another theoretical example, if there are 100 investments and you have some way to assess the merits of these investments. Would you place an equal amount in each investment or only invest in the 10 best investments (based on your opinion and knowledge).
Diversification is lower risk, average return (the winners are balanced out by the losers), Concentration is higher risk (whether you back the winners or the losers).
Which method you choose depends on your knowledge of the investments and your own attitude to risk.
After years of trading and investing I've found the concentration method now works best for me, it is higher risk/reward, but managing 10 investments effectively is also much simpler than managing 100.
Edit : I'm not surprised that diversification is more popular on these forums, most people who invest in P2P are not looking for high risk/reward (higher risk than a savings account perhaps but not high risk). Those that want high risk/reward head to the stock market.
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Post by dualinvestor on Apr 28, 2016 15:18:57 GMT
Mr Buffet is not, on the whole, putting money into fixed interest investments with security. He is also an investor with a "wealth of knowledge" of what he is investing in, Berkshire Hathaway has a surprisingly narrow portfolio in terms of sector diversification, it also has a research department full of very highly paid and, hopefully, skilled analysts. Investing in loans with Funding Secure is more like acting as a pawn broker, except generally their rates are significantly higher and their LTV significantly lower. So coming back to topic the type of diversification you seek depends on your appite for risk, are you in roulette terms someone who bets on a single number with potential returns of 35:1 with a risk of 36:1 or who bets on a colour with potential returns of evens but a risk of 19:18. As the tired old cliche goes if something is too good to be true it usually is. So a promised return of 12%, 14%, 16% or whatever when other fixed interest investments are returning less than half that must come with a certain amount of risk, therefore however you diversify that risk is a matter of personal choice and it is very unlikely that any one person will have exactly the same attitude as any other, but to compare investing in P2P to what Mr Buffet does is far into the realms of fantasy.
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Post by Deleted on May 1, 2016 10:53:44 GMT
dualinvestor, you don't seem to get the idea, as for 'realms of fantasy', think we'll have to agree to disagree  |
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Post by earthbound on May 1, 2016 11:34:25 GMT
If one of your 100k 16% goes bad you lose 100k It would have to go pretty pretty pretty bad to lose the whole 100k, i'm talking disappear into thin air bad.
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Post by dualinvestor on May 1, 2016 14:38:55 GMT
dualinvestor, you don't seem to get the idea, as for 'realms of fantasy', think we'll have to agree to disagree We can agree to disgree on the realms of fantasy point, but I very much get your other point and find it totally unfounded. It is all very well pretending you can "control" a portfolio of 10 loans but if you believe that you know what you are investing in then, unless you are the principal and have done due diligence on each you are, in my opinion, deluded, when placing your money via a third party such as a p2p lending platform.
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Post by Deleted on May 1, 2016 15:14:53 GMT
dualinvestor, full marks for arrogance, we will just have to disagree on everything else.  |
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Post by reeknralf on May 1, 2016 15:18:22 GMT
If one of your 100k 16% goes bad you lose 100k If one of your 12% loans goes bad you lose a minuscule amount I am always surprised by the extent to which people diversify purely to minimise losses within their portfolio. There's nothing wrong with this. If you hate defaults, it's perfectly valid. But if you hate defaults that much, you're perhaps in the wrong game. If we're talking about FS bonuses, the loans are the same, so the 16% portfolio would outperform the 12% portfolio in any plausible default model. If 10% of the 16% loans are wiped out, you still make 4.4%. If 10% of the 12% loans are wiped out you make 0.8%. You've got to really hate defaults to prefer the latter portfolio.
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SteveT
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Post by SteveT on May 1, 2016 16:01:56 GMT
Mod comment: Can I please remind those involved in this thread of the first of the Forum Rules: "Please be polite and constructive". Differences of opinion are fine, personal comments and insults are not.
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stevio
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Post by stevio on May 1, 2016 20:26:13 GMT
If one of your 100k 16% goes bad you lose 100k If one of your 12% loans goes bad you lose a minuscule amount I am always surprised by the extent to which people diversify purely to minimise losses within their portfolio. There's nothing wrong with this. If you hate defaults, it's perfectly valid. But if you hate defaults that much, you're perhaps in the wrong game. If we're talking about FS bonuses, the loans are the same, so the 16% portfolio would outperform the 12% portfolio in any plausible default model. If 10% of the 16% loans are wiped out, you still make 4.4%. If 10% of the 12% loans are wiped out you make 0.8%. You've got to really hate defaults to prefer the latter portfolio. Exactly who wants defaults? If you love defaults so much, go ahead. Your comparing a % of loans which is incorrect. You would have a much smaller number of 16% loans compared to 12%. Therefore a default of a 16% loan would have a much bigger effect to your portfolio.
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