Advantages of Marketplace LendingNov 16, 2017 Blog Marketplace Lending
The advantages of investing in a marketplace lending portfolio as published in lendchat.com.
Low volatility, high returns
Generally speaking, the risk of an investment is related to the return. In other words, the more risk you take on, the higher returns you can expect to achieve. However, due to high risk, you would generally experience higher volatility levels. Let’s look at property and equity (shares in a company) as 2 comparative examples.
If you invest in property, the value of the property wouldn’t fluctuate by as much as the stock market (take the top 40 shares on the JSE for example). However, over the long term, you generally achieve a higher annualized return from investing in the JSE top 40, compared to that of a property.
Have a look at the overview below:
Can you see the sweet spot? There are always exceptions to the rule, but if you’re able to successfully manage your MPL investment, you can achieve attractive returns, while enjoying low levels of volatility. Many of the most successful investors in the world, have illustrated that mitigating the risk of loss within an investment, is as important, if not more important than achieving high returns. The best way we can illustrate this, is with the following 2 examples:
As you can see, in both examples, an average of 10% pa ROI was achieved. The difference is that Peter experienced higher levels of volatility, compared to Paul. The end result is that Peter is left with R108. A total ROI of 8%, after the 4 years. Whereas Paul ends up with R146, or 46% total ROI. This vast difference in “end of the day” performance, is purely due to volatility. You can shuffle the returns within the 4 years, but the end results stay the same.
When looking at the returns of which one is able to achieve through a MPL portfolio, this is a very open ended discussion. For the purpose of keeping this post simple enough not to let you fall asleep, I would say that one is able to comfortably achieve a net ROI of anything between 10%, going all the way up to 20%. Naturally, there will be exceptions.
As most investors would agree, if you can achieve a consistant 15% pa return on an investment, you are doing well! Never mind the fact that the ride is considerably less bumpy than most other investing alternatives.
Investing in marketplace lending has very low barriers of entry. It’s easy to register & minimum investments are low. In fact, it’s one of the lowest of any investment class.
Couple this with the ridiculously efficient transaction processing, one is able to build a fully customized portfolio, depending on your risk appetite. Do you want higher returns, while accepting higher volatility? No problem! Invest in riskier notes. If you’re concerned around the effect which the default rates will have on your portfolio, specifically the volatility, no problem! Invest in more of them – diversify. If you want to play it as safe as possible, while enjoying a smooth ride, then invest in the low risk loans – some argue that these are, at the end of the day, more profitable than most, by the way. You can balance your portfolio however you like. Just make sure you always diversify.
Generally speaking, lending money, if managed & regulated correctly, is good for the economy.
From helping Jack & Jill consolidate their debt at a lower fee, to helping John renovate his house, to helping “Startup (Pty) Ltd” leverage their business. You can decide who, and how you would like to lend money.
Another reason why I have so much belief in this concept, is the fact that, as the market matures, it will organically adjust, according to the market itself. This is not the bank setting the rates. It’s the marketplace itself – the bigger part we, as retail investors play in the marketplace, the better for everyone.
I appreciate that the real life scenario is not as clean cut as my theories mentioned in this post, but I hope you get the crux of my points.
Yes, there will be greedy participants, like with any space where money is involved, but I am optimistic that the good will outweigh the bad.
So, my conclusion is that, you could achieve higher (peak) returns from other investments, be it buying shares on the JSE, or buying into a business, or even flipping houses. However, if managed correctly, the MPL investment may be the tortoise who wins the race.