Flight distance: a P2P story

We’ve all seen seaside holidaymakers strolling along the boardwalk, proudly (naively) sporting their paper cone of chips. In swoops a seagull – chips are lost, pride is wounded. The daring seagull has demonstrated a fairly short flight distance – how close it will get to a human before retreating (NB flight distance is not the distance it has flown in order to steal its salty, vinegary snack).

The same phenomenon is observed watching pigeons in the park; those that get close enough to humans are rewarded with the crumbs fresh from your sandwich. If they get too close (short flight distance) they may get a lazy foot swung in their general direction, risking injury. If they stay too far away (long flight distance) they’ll miss out on your carbohydrate detritus. A well-judged, balanced approach is required to survive.

Financial flight distance

This risk/reward assessment by pigeons, seagulls and all the beasts of the earth is analogous to some of our financial interactions. Our financial flight distance isn’t necessarily which assets we choose to invest in – there’s a separate risk/reward decision about whether to put our money on 16 red, under the mattress or in Tesla stock.

Rather, our financial flight distance reflects how we behave once we’re already invested in something. We’ve already decided we want to earn interest on our investments (pilfer a chip, in seagull terms). The financial flight distance is the point at which we bail out and seek those returns elsewhere. You might withdraw investments from an asset because of mounting risk, worsening losses, opportunity for better returns elsewhere, or change in circumstances.

The investor who flees at the first sign of trouble (long flight distance) risks missing out. If you sold off your entire equity holdings every time they hit -1% you’d probably miss out on gains and possibly suffer prohibitive fees. Conversely, the investor who tries to get out too late (short flight distance) might not actually be able to get out at all, losing capital as that niche cryptocurrency’s value or company’s stock trends to zero.

One’s financial flight distance is borne of the many factors and biases that determine our behavioural approach to finance. Understanding your flight distance and the why behind the decisions you’re making is important for growing as an investor and minimising the risk of losing capital.

P2P flight

The value of my P2P lending portfolio between February 2019 and January 2020. The rise in value represents an equivalent 3% annual return. The September-November plateau reflects withdrawal of capital from the loan market, while in January 2020 I withdrew from P2P altogether.

Peer-to-peer (P2P) lending has always made me slightly unnerved. For sure it’s above board; it’s not exactly betting on backstreet cock fights. Plenty of people have made good medium-term returns with P2P investments. It even has its own ISA subtype – the innovative finance ISA (IFISA). And still it’s never sat quite right with me. My inner instinct said: avoid it. Using this sort of financial gestalt isn’t always robust as a decision-making tool – how many people have lost money believing that ‘X is the next big thing’? So I decided to go against the gut feeling and try P2P out.

You can see that, following my initial investment in February 2019, things ticked along fairly nicely. I was receiving an equivalent annual interest rate of 3%. Not spectacular and certainly well below (expected) equity returns, but better than the returns on a host of non-equity investments.

Come September 2019, Ratesetter (the lending platform I’d been using) changed the rules of the game. The spidey-sense was tingling. You can see the plateau as I took money out of the loan markets. I was unsure whether the returns still merited the risk, and wanted to see the after-effects of the announcement. The boat appeared to be relatively un-rocked, so I dove back in for another french fry month in December 2019.

Reading the tea leaves

P2P lending platforms Lendy (May 2019) and FundingSecure (October 2019) had already collapsed during the year. This provoked tighter FCA regulations for P2P in December 2019. This should have reduced my concerns about P2P investing, yet come January 2020 I decided enough was enough. I felt too close to risk – it was time to flee. I pulled the plug on my P2P investments.

To say that I foresaw the great global catastrophe that was brewing would be a lie. Back then, Covid-19 was still a blip on the edges of our radar. I am, however, glad that I got out of Dodge when I did. It’s been a tumultuous year all-round and P2P has been no exception. There’s been closure to new investors, new account fees, sorely depleted provision funds, slashed investment rates and delays in withdrawal.

Perhaps my flight distance was too long; another month or two might have eked out more interest. The overall percentage of my net worth invested in P2P was never more than a couple of percent, so the total loss of capital wouldn’t have been catastrophic. Even still, I can’t help but feel it was the right decision then.

Diving back in?

I suspect that there’s more misery to come for P2P lending. The extended furlough scheme, soon to evolve into the Jobs Support Scheme, is still doing some propping-up. There’s an increasing number of localised lockdowns within the UK and it’s barely autumn – the chance of second national lockdown is non-zero. Oh and the small matter of Brexit too. I can’t see myself diving back in for another round of P2P investing, certainly not for a good while. As such it’s probably best I keep my equity flight distance fairly short for the meanwhile. Blue-chips do sound rather tasty…

TTFN,

Mr. MedFI

6 thoughts on “Flight distance: a P2P story

  1. I was very close at one point, but for some reason (I can’t remember why) decided against it.

    I’m very pleased I did given the difficulties some people have had getting all their money back. With the state of the economy at the moment, P2P lending offers very little upside for quite a lot of risk with so many people being out of work and so many businesses struggling.

    I have a feeling P2P only became so successful due to the long 10 year bull run we just had…with what appears to be in store, even if the virus subsides, I dare say it’s either a long way off being lucrative again, or even still, has had its last ‘hurrah’.

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    1. Thanks AMM. I suspect there’ll still be some who value P2P as an investment strategy, though I agree that long term its prospects look shaky. It just lies on the wrong side of the risk curve for me.

      Liked by 1 person

  2. Sounds like we’ve had very similar experiences with P2P.

    I opened an account in December 2018 and put in just enough to qualify for the welcome bonus. A little over one year later, I decided to withdraw it all, as the interest wasn’t worth it in my eyes. Roughly 13% in the first year, including the welcome bonus, is great, but only 3% without the bonus was comparable to current account rates at the time, without the security.

    Regardless, I was impressed with how quickly I received my money, and gave it no further thought. Very lucky on my part, as not long later there was suddenly a massive queue to leave the platform. Very glad I got out when I did, and I’m in no hurry to return!

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    1. I too was lucky getting my money out with relative ease, but a few months later would have been much more difficult. I sadly missed out on the 10% welcome bonus by a month, but even that wasn’t incentive enough to hang around for any longer.

      I wonder whether, with current account interests so low, people will be enticed by the marginally better gains for P2P?

      Like

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