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Peer to peer lending for pensions? Really?!

Peer to peer lending for pensions? Really?!Just after I write in a post about Investment Risk , there is news that peer to peer investing with Linked Finance is now available to pension investors. This is not something that we welcome as we believe that peer to peer finance is extremely risky and a lot of investors are not aware of the investment risks.

What is peer to peer lending?

Peer to peer lending is the practice of individuals lending money to other individuals or companies, usually over the internet. Say a company wants to borrow €100,000. Instead of using a bank, they go to an online P2P company to raise it. For example, a number of individual investors can make small contributions to make up the €100,000 total. You are paid an interest rate over the term.

Linked Finance organise this lending for Irish small to medium size enterprises. They act are the middleman between lenders and businesses. They also rate the businesses that you can invest in. Younger, start ups cost more than more established companies and they charge more for a longer lending term (up to 36 months). The interest you can earn ranges between 6% – 17.5%.

Are you an angel investor?

Another relatively new term is “angel investor”. These are wealthy individuals who provide capital for business start-ups in return for part ownership in the business. These people study the business plans given to them, meet with the people involved in running the business and invest in these companies in the knowledge that there is a really good chance that they will lose all of their money. As equity holders in each business, if one takes off like Uber or WhatsApp, they can get back 100 times what they put in. But most importantly, they are wealthy individuals who can afford to lose the money they have invested.

Do you consider yourself an angel investor? Because that is what you are if you invest in SME’s. Do you read the business plans? Do you meet the people behind the business? Can you afford to lose all of the money that you invest? We already know that there is zero chance of you getting back 100 times your investment you don’t own any equity. You get interest ranging from 6% – 17.5%.

Risk perception

How risky does the investment feel to you? Do you know what the downside of an investment is to you? WIth peer to peer lending, you can lose all your money.

Most pension investors cannot afford to lose all of the money that the invest in peer to peer projects because they are not at a stage where they have financial independence.

The long term nature of pensions and the lack of access can skew people’s risk tolerance. During the credit crunch recession, lots of people left their pensions in equities but cashed out of personal investments. Why? They were invested in the same assets! But one of them could be accessed now and the other couldn’t.

When people can’t get their hands on money for decades, they don’t see the money as theirs (yet) and can take more risks with their investments.

Consistency beats volatility

It is often said that the two conflicting emotions that rule investors are fear and greed. But we must add to that the basic human instinct for “belonging” and “acceptance”. In other words, if your friends appear to be making a fortune from the peer to peer lending or Bitcoin, you not only feel that you are missing out (greed) but also that you are not one of the in-crowd (acceptance).

Anyone who finds themselves challenged in this way should take comfort from years of academic research and the mathematics underpinning the concept that consistency beats volatility.  A globally diversified portfolio of “boring” index funds will beat the “exciting” hot thing over the long-term. This is how you truly build wealth over the long term. 

If you have any questions, send me an email at [email protected]

Steven Barrett

18 December 2017