In the past you deposited your savings with a bank and the bank manager advanced your money as loans to exactly the same customers who are now borrowing under P2P schemes. The bank charged 10% and you got 2%. The margin covers the inevitable default risk, but there is ample profit by applying basic risk management to minimise defaults.
It's all about diversification of risk, you assume there will be defaults and you allow for them when anticipating returns. All P2P does is cut out the overcharging for managing the default risk. Instead of a bank doing it for 8% the P2P schemes take 1%.
People are saying P2P is more like an investment - if you did economics you know that "Savings = Investments". They are the same monies, it's just that with P2P the intermediary process that establishes a third party (the bank) between you, the saver, and the company that borrows your money, is removed. You now see what your money is earning instead of someone else using it to make a profit and giving you what's left over.
Rather than look at P2P as risky, you should look at a 6% return on a diversified P2P account as the average open market return for investing in private debt, after defaults. If you get 0.5% from a safe guaranteed deposit by lending to the UK government, but 6% with less certainty by lending to financially sound companies, you should look at 5.5% as being the "risk premium". Put the other way, are you happy paying 5.5% to guarantee a 0.5% return and return of your capital.
Some P2P schemes give a choice of a secure rate of return where the scheme covers the default risk, or a higher, but variable rate where you carry the impact of default risk.
There is no comparison between a bank going tits up and the default risk on a P2P debt instrument. The banks went tits up because they were lending money backed by securities that didn't exist. It wasn't defaults that killed the banks it was the fact that the security against the defaults didn't exist and the banks deposits and assets were an inadequate fraction of their liabilities. P2P can't possibly suffer the same fate as the security against the loan is tangible, has value is non transferrable and remains the property of you the investor.
The risk in P2P is the reliability of the selection of borrowers. The larger the number of borrowers the more the risk is spread and the less will returns diverge from the mean average after allowing for defaults.
I knew all that but you've explained it much better than I could.
One of my clients had a load of spare cash and decided to lend it out directly to property developers as he could charge 10-12% at the time, lend at 60% of value and had the expertise to take the property on himself if it went wrong. The first lot he lent £1M to. Turned out it was a fraud and they ran off with the lot.
I am sure the P2P lenders are more savvy... But it happens.
One of my clients had a load of spare cash and decided to lend it out directly to property developers as he could charge 10-12% at the time, lend at 60% of value and had the expertise to take the property on himself if it went wrong. The first lot he lent £1M to. Turned out it was a fraud and they ran off with the lot.
I am sure the P2P lenders are more savvy... But it happens.
He should have taken a charge out on the property which is what the P2P companies do.
One of my clients had a load of spare cash and decided to lend it out directly to property developers as he could charge 10-12% at the time, lend at 60% of value and had the expertise to take the property on himself if it went wrong. The first lot he lent £1M to. Turned out it was a fraud and they ran off with the lot.
I am sure the P2P lenders are more savvy... But it happens.
Ask him if he wants to recoup his losses on a bridge I want to sell.
For those with not a lot of money, not looking at investing and just wanting savings accounts.........
Normal saving accounts interest rates are pointless at the moment. Currently the best savings interest rates are bizarrely linked to current accounts because they limit the amount of money the interest is earned on. I currently have 5 current accounts with different banks and 4 monthly savings plans. Current Accounts have 3,4 and 5% interest rates on maximum amounts of 2k, 2.5k and 3k. I used these basically as savings accounts, putting money in them until they reach the limit they pay interest on (then not adding any more). Then after these accounts are maxed I leave the money in there earning interest and moved onto my monthly savers which allow various maximum monthly deposits of £250, £300 and £500 with the interest being 5% or 6% on each. 1 of my current acc's I never use or keep money in as the money earns no interest in it, it is only open to get access to the monthly saving plan.
I currently am lucky enough to have quite a bit of disposable income so can currently save a decent amount and can spread the money over several different accounts as I do every month. I appreciate most won't be able too, or don't have the credit rating that means they would be accepted for several accounts, but it may still be worth looking at the different current acc's and monthly plans if you just have a little bit of money you wish to save. Plus you have the bonus that you can have access to your money when needed without fees or waiting times.
For people like me just starting to take an interest in finances and knowing nothing about investing or the stock market (and with even less confidence in dealing with it), I find this is a relatively simple and non risky way to get started. It takes a little bit of effort working out moving money around accounts as some require minimum monthly deposits, but after dd's are set up you can just forget about it.
The "money savings expert" site lists all the best interest current and savings accounts and is easy to follow.
We invest all our spare cash in premium bonds, no interest but the prizes we have won this year is far greater than any interest we would have received elsewhere.
One of my clients had a load of spare cash and decided to lend it out directly to property developers as he could charge 10-12% at the time, lend at 60% of value and had the expertise to take the property on himself if it went wrong. The first lot he lent £1M to. Turned out it was a fraud and they ran off with the lot.
I am sure the P2P lenders are more savvy... But it happens.
He should have taken a charge out on the property which is what the P2P companies do.
He thought he had. They didn't own it though as they were fraudsters so it was worthless security for him.
We invest all our spare cash in premium bonds, no interest but the prizes we have won this year is far greater than any interest we would have received elsewhere.
Nothing wrong with that. basically govenment backed Lottery, where you get your stake back.
I've been in Zopa for just over 4 years now (7/7/12 to be precise). I've never had one default. When I started return was over 7%. I've still got a few 7% loans out there but most are between 3 and 6%.
Also have funding circle which is lending to business as mentioned above. Had a couple of small defaults a few years back but overall return was double figures, I loaned to a lot of companies but small amounts so it spreads the risk. As the loans are paying off I'm not lending it back again post brexit.
Like any portfolio, spread is key, many baskets and many eggs.
My static pension with fidelity has shot up since earlier in the year, up over 25% in that time, as has my S&S ISA.
Make sure you are making use of your ISA allowance, goes up to £20k next year. Also any other tax breaks you can get.
A little note in case people haven't heard. As of April, basic rate tax payers no longer pay tax on the first £1000 of earned interest (top rate tax players get £500). This £1000 is separate to any ISA's you have, so depending on how much money you're saving, ISA's may not be the most profitable saving idea anymore.
At present P2P lending is subject to tax but they are seeking authority to provide ISAs. This would mean that as well as the £1000 or £500 tax free savings mentioned by DRAddick any P2P returns would also be tax free. The authority is expected to be given later this calendar year.
Premium Bonds are great when interest rates are so low. But I believe you're still limited to £30k per person.
Everything else should go long term into your pension pot to stop those nasty people from HMRC getting their hand son it.
Well, you say that. But, of course, it's a choice: tax breaks now but paying tax on the pensionable income in due course. I have long wondered whether a stocks and shares ISA is a better long-term bet than a personal pension. Okay, no tax breaks now but when it comes to retirement age, no decisions on whether to go for an annuity or drawdown and all income would be entirely tax free. I've yet to see any sort of research on this. Has anyone done any? Perhaps a cynic would say it was not in the industry's interest to do any!
Premium Bonds are great when interest rates are so low. But I believe you're still limited to £30k per person.
Everything else should go long term into your pension pot to stop those nasty people from HMRC getting their hand son it.
Well, you say that. But, of course, it's a choice: tax breaks now but paying tax on the pensionable income in due course. I have long wondered whether a stocks and shares ISA is a better long-term bet than a personal pension. Okay, no tax breaks now but when it comes to retirement age, no decisions on whether to go for an annuity or drawdown and all income would be entirely tax free. I've yet to see any sort of research on this. Has anyone done any? Perhaps a cynic would say it was not in the industry's interest to do any!
It depends on your income now v's what you expect in retirement. Also don't forget with a pension you are getting the relief now, so that tax relief you receive has the opportunity to grow. If my pension has gone up 25% then it's also the amount the government pay in has also benefitted from that growth.
There is a quirk for anyone who earns between 100k and 120k. If for instance you earn £120k then that last £20k is taxed at 62%, 2% NI and every £2 over £100k you lose £1 of your tax free allowance adding a further 20% to the 40% you already pay....... Therefore paying in £7,600 of income means the government top it up with £12,400..... not to be sniffed at.
Pensions are much more flexible now, can be left to children etc and also you don't have to buy an annuity. That said if you earn over £150k they start to take your allowance away of what you can pay in tax free.
ISA's are good, as you say when you draw on them all income/withdrawals are tax free. I have both a pension and a S&S ISA. Although my wife is a very low earner I also pay into a pension for her as everyone can put £3,600 into pension even if you don't work, you still get 20% tax relief, so only pay in £240 a month/£2,880 a year to get £3,600.
Premium bonds are a safe haven but generally a low return, but then you could get lucky, £50k is now the maximum. I buy £500 a month.
re the £500/£1,000 allowed in interest tax free, the benefit of an isa is it'll always be tax free, so if you begin to exceed the £1k the non ISA loses benefit. If you don't lose your ISA allowance in any given year it's gone. So use it or lose it!
A little note in case people haven't heard. As of April, basic rate tax payers no longer pay tax on the first £1000 of earned interest (top rate tax players get £500). This £1000 is separate to any ISA's you have, so depending on how much money you're saving, ISA's may not be the most profitable saving idea anymore.
Almost right.
40% tax payers get £500. Top rate (45%) get nothing.
I would like to ask for some guidance about bonds. We are often told that they should be a part of a sensible portfolio (e.g. in a SIPP) but I have never fully understood how to understand that investment.
I understand the basics, that there are two types, government and corporate. Governments and corporates use them to raise money. We are lending to them by buying them. Correct? I also thought that when they issue these bonds they have a certain interest rate at which they pay back. So they are supposed to be boring but reliable (government more than corporate, but the latter has higher returns)
OK but why then do the professionals talk about the 'bond market" and whether or not it is a good idea to be in it. When is it a bad idea? What goes wrong and why?
I only invest via unit trusts, not directly. In my SIPP, my IFA put me into a few unit trusts which invest in the bond market. i understood that to be part of the "balanced portfolio" approach. If markets tank, the bond funds at least, would hold up. One of them was Artemic Strategic Bond. Well the performance charts suggest its a bit of a turkey, but if you look at the one year chart, both this fund and the relevant index found themselves in negative territory earlier this year. I guess my question is, how can they actually lose you money if the bonds are all paying interest and presumably do not default?
I would like to ask for some guidance about bonds. We are often told that they should be a part of a sensible portfolio (e.g. in a SIPP) but I have never fully understood how to understand that investment.
I understand the basics, that there are two types, government and corporate. Governments and corporates use them to raise money. We are lending to them by buying them. Correct? I also thought that when they issue these bonds they have a certain interest rate at which they pay back. So they are supposed to be boring but reliable (government more than corporate, but the latter has higher returns)
OK but why then do the professionals talk about the 'bond market" and whether or not it is a good idea to be in it. When is it a bad idea? What goes wrong and why?
I only invest via unit trusts, not directly. In my SIPP, my IFA put me into a few unit trusts which invest in the bond market. i understood that to be part of the "balanced portfolio" approach. If markets tank, the bond funds at least, would hold up. One of them was Artemic Strategic Bond. Well the performance charts suggest its a bit of a turkey, but if you look at the one year chart, both this fund and the relevant index found themselves in negative territory earlier this year. I guess my question is, how can they actually lose you money if the bonds are all paying interest and presumably do not default?
I'll try to help by way of giving an example. Some years ago because I estimated that interest rates had peaked, I bought some corporate bonds directly. Amongst these was a bond called "National Grid Gas 8.75% 2025". The nominal value was £5972 and the cost was £5989. The current value is £9018. In the meantime, I've been receiving interest at 8.75% on the nominal value. The price has gone up because that interest rate is now pretty much unachievable, so people are prepared to pay a premium. As 2025 (the redemption date) approaches that value will gradually decline until it's back to £5972 because that's all that will be paid out. (Unless interest rates rise back to more usual levels in which case the value will also decline to equalise return with market comparators.)
So, if you are buying bonds through a OEIC fund. The fund price will fluctuate as: the capital value of the underlying bonds varies according to market sentiment; interest rates change; the fund receives interest on the investments which is reinvested in other bonds; the fund pays itself fees and commission; and the fund pays out a dividend to you. Depending upon the risk profile of the fund, it is also either more or less likely that some of the underlying investments are either more or less likely to default. Obviously a defaulting bond means that you lose that portion of your investment. A bond in National Grid might be perceived as being safe. A bond in Charlton Athletic Football Club Ltd, well, less so! Do you know what the make up of your fund is?
A further complication may have been quantitative easing. For every fresh pound issued by the Bank of England in this process, the Bank has bought bonds (and some Gilts) from the market and is holding them to back the note issue. The Bank currently holds over £400bn of bonds. I'm guessing here but that may have meant that bond prices have been a little overstated at around the time you bought? If QE ends and those bonds gradually come back to the market, it will maybe depress prices.
Instead of spending hours worrying about your investments, researching and posting threads on how to make the most of what you have, why not just live, love, laugh and be happy.
Go out and spend some of your investments. Enjoy it with friends and family. Share the love. Make the most of every minute whilst you can as you never know what tomorrow will deliver.
There's more to worry about in life than whether or not you're getting a 6% return on your investments instead of 2%. There are plenty of people on here who really do have to worry, because of the debt they're in and how they are going to manage to pay it off.
Do you buy a car dependent on it's residual value after five years, or do you buy one that you like and suits your needs?
If you buy a 20 year bond when issued by say Vodafone and hold it to expiry then yes, absent defaults you won't lose money - you will receive 20 years of coupons and your money back.
However most bonds aren't owned for their entire duration - if interest rates have risen meaningfully after say 3 years then the value of the above bond will have fallen significantly and you will suffer a loss if you choose or need to sell it. The longer the duration of the bond, the more significant the impact.
Bond pricing is devilishly complex but the basics are straightforward.
Sorry, forgot to say two things. First the old school thinking was that pension money should initially be invested in equities and then, as retirement approached those holdings should gradually be converted to a less risky holding in bonds with a secure annual payout. These days, actuaries don't seem to much like the risk element of equities and they tend to be shunned a bit. This has been one of the reasons that pension funds are all running in deficit because fleeing to a less risky investment has meant that they have also lost out on much of the gains. Second, it's may be worth pointing out that some things marketed as bonds are not. Insurance bonds and savings bonds are two examples. The first is merely an insurance product with underlying investment in various funds, the second is just a long-term savings (usually fixed rate) deposit account.
Interesting and challenging post as usual. Thanks. More later if I may. Have to slip out in my much loved almost unique ( in the sense that I hardly ever see another on the road) car :-)
Comments
I am sure the P2P lenders are more savvy... But it happens.
Normal saving accounts interest rates are pointless at the moment. Currently the best savings interest rates are bizarrely linked to current accounts because they limit the amount of money the interest is earned on. I currently have 5 current accounts with different banks and 4 monthly savings plans. Current Accounts have 3,4 and 5% interest rates on maximum amounts of 2k, 2.5k and 3k. I used these basically as savings accounts, putting money in them until they reach the limit they pay interest on (then not adding any more). Then after these accounts are maxed I leave the money in there earning interest and moved onto my monthly savers which allow various maximum monthly deposits of £250, £300 and £500 with the interest being 5% or 6% on each. 1 of my current acc's I never use or keep money in as the money earns no interest in it, it is only open to get access to the monthly saving plan.
I currently am lucky enough to have quite a bit of disposable income so can currently save a decent amount and can spread the money over several different accounts as I do every month. I appreciate most won't be able too, or don't have the credit rating that means they would be accepted for several accounts, but it may still be worth looking at the different current acc's and monthly plans if you just have a little bit of money you wish to save. Plus you have the bonus that you can have access to your money when needed without fees or waiting times.
For people like me just starting to take an interest in finances and knowing nothing about investing or the stock market (and with even less confidence in dealing with it), I find this is a relatively simple and non risky way to get started. It takes a little bit of effort working out moving money around accounts as some require minimum monthly deposits, but after dd's are set up you can just forget about it.
The "money savings expert" site lists all the best interest current and savings accounts and is easy to follow.
Average returns are 1.25%.
http://www.moneysavingexpert.com/savings/premium-bonds
Excellent return on capital employed earlier in the year!
Everything else should go long term into your pension pot to stop those nasty people from HMRC getting their hand son it.
http://www.moneysavingexpert.com/savings/premium-bonds
Also have funding circle which is lending to business as mentioned above. Had a couple of small defaults a few years back but overall return was double figures, I loaned to a lot of companies but small amounts so it spreads the risk. As the loans are paying off I'm not lending it back again post brexit.
Like any portfolio, spread is key, many baskets and many eggs.
My static pension with fidelity has shot up since earlier in the year, up over 25% in that time, as has my S&S ISA.
Make sure you are making use of your ISA allowance, goes up to £20k next year. Also any other tax breaks you can get.
The threshold for this is only £1k, btw
I have long wondered whether a stocks and shares ISA is a better long-term bet than a personal pension. Okay, no tax breaks now but when it comes to retirement age, no decisions on whether to go for an annuity or drawdown and all income would be entirely tax free. I've yet to see any sort of research on this. Has anyone done any? Perhaps a cynic would say it was not in the industry's interest to do any!
One of them was an investment in Camden Brewry which was a shares, only £100 but when they were sold make £70.
There is a quirk for anyone who earns between 100k and 120k. If for instance you earn £120k then that last £20k is taxed at 62%, 2% NI and every £2 over £100k you lose £1 of your tax free allowance adding a further 20% to the 40% you already pay....... Therefore paying in £7,600 of income means the government top it up with £12,400..... not to be sniffed at.
Pensions are much more flexible now, can be left to children etc and also you don't have to buy an annuity. That said if you earn over £150k they start to take your allowance away of what you can pay in tax free.
ISA's are good, as you say when you draw on them all income/withdrawals are tax free. I have both a pension and a S&S ISA. Although my wife is a very low earner I also pay into a pension for her as everyone can put £3,600 into pension even if you don't work, you still get 20% tax relief, so only pay in £240 a month/£2,880 a year to get £3,600.
Premium bonds are a safe haven but generally a low return, but then you could get lucky, £50k is now the maximum. I buy £500 a month.
re the £500/£1,000 allowed in interest tax free, the benefit of an isa is it'll always be tax free, so if you begin to exceed the £1k the non ISA loses benefit. If you don't lose your ISA allowance in any given year it's gone. So use it or lose it!
40% tax payers get £500. Top rate (45%) get nothing.
Academic point for most I accept.
Information not recommendation.
http://www.kentsavers.co.uk/content.asp?section=49&bgc=&sbgc=
I understand the basics, that there are two types, government and corporate. Governments and corporates use them to raise money. We are lending to them by buying them. Correct? I also thought that when they issue these bonds they have a certain interest rate at which they pay back. So they are supposed to be boring but reliable (government more than corporate, but the latter has higher returns)
OK but why then do the professionals talk about the 'bond market" and whether or not it is a good idea to be in it. When is it a bad idea? What goes wrong and why?
I only invest via unit trusts, not directly. In my SIPP, my IFA put me into a few unit trusts which invest in the bond market. i understood that to be part of the "balanced portfolio" approach. If markets tank, the bond funds at least, would hold up. One of them was Artemic Strategic Bond. Well the performance charts suggest its a bit of a turkey, but if you look at the one year chart, both this fund and the relevant index found themselves in negative territory earlier this year. I guess my question is, how can they actually lose you money if the bonds are all paying interest and presumably do not default?
As 2025 (the redemption date) approaches that value will gradually decline until it's back to £5972 because that's all that will be paid out. (Unless interest rates rise back to more usual levels in which case the value will also decline to equalise return with market comparators.)
So, if you are buying bonds through a OEIC fund. The fund price will fluctuate as: the capital value of the underlying bonds varies according to market sentiment; interest rates change; the fund receives interest on the investments which is reinvested in other bonds; the fund pays itself fees and commission; and the fund pays out a dividend to you. Depending upon the risk profile of the fund, it is also either more or less likely that some of the underlying investments are either more or less likely to default. Obviously a defaulting bond means that you lose that portion of your investment. A bond in National Grid might be perceived as being safe. A bond in Charlton Athletic Football Club Ltd, well, less so! Do you know what the make up of your fund is?
A further complication may have been quantitative easing. For every fresh pound issued by the Bank of England in this process, the Bank has bought bonds (and some Gilts) from the market and is holding them to back the note issue. The Bank currently holds over £400bn of bonds. I'm guessing here but that may have meant that bond prices have been a little overstated at around the time you bought? If QE ends and those bonds gradually come back to the market, it will maybe depress prices.
Does that help? (Or not!?)
Go out and spend some of your investments. Enjoy it with friends and family. Share the love. Make the most of every minute whilst you can as you never know what tomorrow will deliver.
There's more to worry about in life than whether or not you're getting a 6% return on your investments instead of 2%. There are plenty of people on here who really do have to worry, because of the debt they're in and how they are going to manage to pay it off.
Do you buy a car dependent on it's residual value after five years, or do you buy one that you like and suits your needs?
You're getting old Prague
However most bonds aren't owned for their entire duration - if interest rates have risen meaningfully after say 3 years then the value of the above bond will have fallen significantly and you will suffer a loss if you choose or need to sell it. The longer the duration of the bond, the more significant the impact.
Bond pricing is devilishly complex but the basics are straightforward.
Second, it's may be worth pointing out that some things marketed as bonds are not. Insurance bonds and savings bonds are two examples. The first is merely an insurance product with underlying investment in various funds, the second is just a long-term savings (usually fixed rate) deposit account.
Terrific post, thanks. Thanks too, @newyorkaddick. More later, if I may.
@Addickted
Interesting and challenging post as usual. Thanks. More later if I may. Have to slip out in my much loved almost unique ( in the sense that I hardly ever see another on the road) car :-)