P2P lending: diversifiction / diworseification

Diversification is not keeping all your eggs in one basket.  But how many baskets is enough in the world of P2P?  At what point does diversification become diworsification?

For those of you who don’t know, P2P is Peer to Peer lending/investing is a modern way to match savers/investors with debtors/entrepreneurs.  It matches lenders/borrowers and cuts out the middleman (banks) to give a better rate of return for the investor.

If Joe Blogs wants to buy a new car, they can get a bank loan for £5,000 at 10% APR.  If Janette Blogs deposits £5,000 she gets 0.5% APR.  But if Joe and Janette agree together, they can both get a better deal.

But you might be crazy to lend £5,000 to a stranger!  They might never pay for any number of reasons.  So, it makes sense to maybe lend £10 to 500 people – it’s called diversification and it’s the exact same as not putting all your eggs in one basket and why you shouldn’t use just one P2P platform or lend too much to one lender (BTDT by the way).

All Eggs In One Basket CartoonI’ve been using a range of P2P investment platforms for over 10 years and I’ve had some success with them.  Compared with cash savings or (when I had it) offset mortgage, I’ve done really well with around a 9% return of capital (IRR) over that time.

Now, I’ve made mistakes and bad investments and good investments and learnt a lot.  It’s been an investment in time as well as money but I’m not a huge investor anymore, with only around 6% of my assets in P2P lending – and most of them are in Abundance Generation.

I keep an eye on developments over at the p2pindependentforum which is a fount of information.  But my interest in P2P has been tempered with an inability to jump onto the newest platform in town.  I invest in long established P2P investment platforms like ZOPA, Funding Circle and RateSetter.  I’m sure that there are others, but for my purposes, everything is already set-up with these.  I can invest money in when I have strong cash flow and choose to sell when I need to free up some cash – Funding Circle is most convenient for that but RateSetter is great if you plan to invest for a fixed period or say, you need a steady stream of income over 5 years.  Before we bought our house, I had our deposit in RateSetter on a rolling monthly contract earning 4% – which added up to a couple of hundred pounds over a few months.

The point I want to make is that I’m not too tempted by the other platforms and I already have enough other accounts to keep an eye on.  So I was surprised when I stumbled across this website called financial thing and say this pie-chart. P2P chart

Now, I love a good pie-chart as much a the next person – but I was shocked by this persons diversification.  I count 19 different accounts – some of which might have an IFISA account and standard account.  How much time does it take to keep an eye on all of these accounts, knowing which one to move money into/out of?  It probably takes up a lot of time and energy.

My feeling is that since I already have ISAs, SIPPS, company sipps, house, cash accounts, regular savers, VCTs, individual shares, stoozing credit cards, a house and mortgage and a wife and soon to be two kids – that I don’t need another dozen P2P accounts on top of that.

If I was able to earn an extra 1% from these new accounts, that would be £100 on a £10,000 investment.  But it would take an hour or two to research, read up and set-up the account, and a few minutes (minimum) each month to manage the account and at month end to measure performance.  So, it probably isn’t a great use of my time.

That’s one of the reasons I have about 90% of my share assets in ETFs and I don’t try to pick shares.  If I was good at it (and I may not be), it still doesn’t pay off in terms of life energy.

In summary, this isn’t a case for P2P being good or bad.  My experiences are that it is useful, especially if you understand the product and the risks.  They are also useful if you have high cash flow levels coming in/out of your account and can plan ahead.  But, I think that once you’ve passed holding investments in 4 or 5 platforms, the benefits of diversification are outweighed by the increase in admin and energy required.

I’m saying you should use the KISS principle – Keep it Simple Safely   You might just be better using Vanguard life strategy like people wiser than me have suggested.  As usual, do your own research and keep your eyes open before you open your wallet.

Good luck,


*Note, some of the links (ZOPA and RateSetter) contain referrals for which I may get some money to buy my kids shoes.  Please feel free to do your bit and help a humble Family Man out.



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