Crowdlending is a risky investment
Like other investment forms, P2P lending and real-estate crowdlending come with associated risks. This post will introduce you with several classical investing mistakes that beginner and even advanced investors may make.
Basically, it boils down to being patient, diversifying your portfolio, being on the lookout for red flags, and having realistic performance expectations – don’t let greed cloud your judgment ! -.
Investing mistake #1 : investing money you need
Always consider your future financial needs before investing. Many P2P lending companies provide a secondary market, but you’ll usually have to sell your loans for a discount, thus losing money. Worse, if this feature isn’t available, your money will be stuck for a long time.
Also, what if things go wrong ? Crowdlending – especially in the Baltics – is mostly an unregulated area. There’s little or no supervision of platforms, which leads to an increased risk. Moreover, the higher returns (compared to most over investments) also inherently lead to higher risks !
As I’m updating this article again in February 2020, two platforms proved to be scams. I’ve lost a bit more than 10% of my portfolio; however, it was money I could afford to lose – and my overall performance is still around 9% annually -. Unfortunately, I’ve read several heart-breaking stories from Envestio investors on Telegram channels; one of them lost the equivalent of 6 or 7 years of savings, which was supposed to be the down payment for his future house ! Don’t be like him, and don’t invest money that’s critical to your future.
Investing mistake #2 : investing too much in loans
As pointed out in the previous paragraph, investing in loans is risky – even in presence of a reassuring buyback guarantee -.
As a rule, I’d advise not to invest more than 10% of your assets in loans – make it 20% if you feel especially brave, or at the contrary if you invest only in conservative loans through highly reputable platforms. While this figure may seem small, it’s really important to always keep the risk factors in mind. What if there’s a large recession and most borrowers can’t reimburse ? Probably even worse, what if a platform goes bankrupt ?
I personally have around 10% of my assets invested in loans. Most of the remaining is invested in real-estate, under various forms – I actually have too much invested in real-estate, and not enough in stock-exchange, but that’s another topic –
Investing mistake #3 : investing too much, too early or in a single project
Don’t be in a hurry ! I always start investing with a small amount, even with reputable companies. It takes time to get used to most websites; you don’t want to improperly invest your money because of a mistake in auto-invest configuration ! So, start small, and take time to get to know the platform. Once the returns satisfy you, gradually increase your investments.
Moreover, investing a lot of money in a short time makes it much harder to spread your capital between many loans, which will hurt your portfolio’s diversification.
When it comes to personal loans, I invest €20 max per loan; for business or real-estate loans, I usually stick to the platform’s minimal investment amount.
I unfortunately broke this rule when investing at Envestio, because the platform had a small number of projects – and to be frank, I was blinded by the high returns -. I ended up paying the price, as I lost around 10% of my portfolio when the platform proved to be a scam. Lesson learned : from now on, I will follow strictly these guidelines.
Investing mistake #4 : investing too much in speculative loans
Last summer, one reader asked in the comments if I considered investing in Envestio as risky. My answer was clear (and is obviously valid for other platforms) : These investments are always risky (you don’t get 15%-20% annually without risk !). In hindsight, it’s obviously painful to re-read this; I should have valued my own opinion much more.
Before the Envestio and Kuetzal events, speculative loans (which I arbitrarily define as yielding more than 15% annually) used to make up around 25% of my loans portfolio. I was comfortable with this figure, as I didn’t take the risk of scam very seriously – how silly of me -. Now things have changed dramatically, and I will rebalance my portfolio towards more conservative platforms.
Investing mistake #5 : investing too much in a single platform
It’s important not to put all your financial eggs in the same basket ! And even more if you plan to invest in speculative loans.
No matter if you want to invest in secured on unsecured loans, for a short or a long duration, in individual or business loans; there will always be several companies offering great investment opportunities. Signing up is usually very easy, so splitting your investment between several companies is a no-brainer.
As an indication, my maximum allocation in a single platform is around 15%. My current Omaraha allocation is well above this threshold for historical reasons, but I withdraw money every month in order to decrease my portfolio’s size.
Investing mistake #6 : not considering the reliability of loan originators
For peer-to-peer loans, it’s important to consider the financial solidity of loan originators; indeed, some of them are very small firms with rather awful financials. Should they go bankrupt (as two originators from Mintos already did), you’re likely to lose a large part of the invested funds ! I’ve recently written an article on this often regarding how to properly select the right loan originators.
Investing mistake #7 : not having enough geographical diversification
For business and real-estate loans, it’s now possible to have a small degree of geographical diversification. Indeed, while historically most Baltic platforms only lent to businesses in these countries, several of them started to fund businesses in Western Europa. For example, Crowdestor lent money to a UK company in order to finance fertilizer export, Flender finances only Irish businesses, and Brickstarter allows to invest in Spanish vacation rental properties.
In a somehow counter-intuitive way, having a geographical diversification for personal loans may actually hurt your portfolio – especially for non-guaranteed loans -. My Omaraha Estonian portfolio performed much better than the ones in other countries (I eventually closed all other portfolios). Similarly, several investors at Bondora hinted that the performance of their Estonian loans was much better than for other countries.
Investing mistake #8 : ignoring red flags
Remember how I broke my guideline #3 – not investing too much in a single loan – ? Well, I’m also guilty of ignoring the rule #8 : taking red flags seriously. Indeed, although Fast Invest was sometimes considered as a Ponzi scheme, I ignored these critics as my investing experience there was overall very positive. All loans were repaid on time, and withdrawals were processed very quickly. However, that’s exactly how I would describe my experience with Envestio until the platform disappeared !
We can’t afford to ignore red flags anymore – especially now that they’re well-documented, instead of being just rumors -. As a result, I’ve decided to blacklist several platforms. Do yourself a favor and treat red flags seriously; when investing, the safety of our capital should be our main concern.