P2P Lending: A viable means of diversification of your investment portfolio
Before publishing my last article [See: Peer-to-peer (P2P) Lending: Six months in], I invested an additional RM1,000.00 (in December 2017), as capital, in P2P lending, through Funding Societies Malaysia. In spite of only depositing RM2,000.00 into P2P lending, I’ve effectively invested RM4,300.00. This is because I reinvested all of the monthly capital and interest repayments, as soon as they’re credited into my account. My previous write-up illustrates this [See: Peer-to-peer (P2P) Lending: Maximising gain and reducing risks].
Since June 2017, or about 8 months ago, I’ve attained a respectable yield of RM91.64 (see above screenshot), mainly from an initial investment of RM1,000.00, in May 2017.
At the moment, I’ve 10 ongoing P2P lending exercises which allow me to spread my investment capital across them, hence reducing the risk of losing a substantial chunk of my investment, should a default occur, without compromising much on the return rate.
Just the other day, a reader asked for my thoughts about introducing P2P lending into a portfolio, as a means of diversification. Like many other investors, that reader experienced the recent volatility in the stock market, in early February 2018, which was swiftly followed by a sharp correction in some markets, including Malaysia.
If you had all of your investments, in your portfolio, invested in equities, surely you would’ve experienced some anxiety and sleepless nights, during a market correction. If your anxiety and sleep deprivation were induced due to the volatility in the market, may be it’s time that you reassess your risk tolerance and diversify your portfolio.
An aspect of diversification, at a portfolio level, can be achieved by reallocating some volatile assets classes, like equities, into less volatile asset classes, and vice versa. The main reasoning for diversification is to ensure that an asset class would not be severely affected by the non-performance of another asset class. The saying of not putting all of your eggs in one basket, comes to mind. According to a prominent American economist, Burton Malkiel, and other academic writers, diversification can be truly effective in mitigating risks when there is no correlation among the performance of the asset classes which constitute the said portfolio. This is because the performance of a non-correlated asset class tends to behave independently of the performance of another asset class within your portfolio.
For example, the performance of P2P lending, as an asset class, has no correlation, or bearing, on the performance of the stock market, and vice versa. Instead, the performance of P2P lending is subject to the ability of a borrowing SME to make repayments towards the satisfaction of a loan. Therefore, even when the stock market is affected by correction, or when sentiment is bearish, non-correlated assets, such as P2P lending, would still be able to maintain good returns, thus softening any major downside from the non-performance of equities.
It is also my view that P2P lending behaves like a counterbalance to most conventional asset classes, in a well-diversified portfolio, because it is not volatile (unlike equities), and it yields a return which is both certain (like bonds, you’ll know its exact yield at the onset – unlike equities, which have uncertain yields) and decent (much better than most bonds and fixed deposits). Further, repayments from P2P lending, which are mostly set at monthly intervals, will provide a regular income stream or could be reinvest, to achieve a higher rate of compounding [See: Wealth Creation through Peer-to-peer (P2P) Lending].
While I can’t be sure that P2P lending is suitable for all, I can only suggest that you give it a try. Consider investing a minimum of RM1,000.00 in P2P lending, as a test, and see whether it sits well with your investing style and portfolio, as it did with mine.
Register an account with Funding Societies Malaysia now as they will top up an additional RM50.00, for free, into your account when you deposit and invest a minimum of RM1,000.00. To participate in this special promotion, please register an account via this LINK (be careful not refresh the link before completing the registration as it will affect the promotion code) or alternatively, use the promotion code: j1mzpcw5 when registering through Funding Societies Malaysia.
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This article is written in association with Funding Societies Malaysia.
do you see p2p becoming as an asset class down the line? in the same league as stocks and equities?
@jonhan I think it would be silly to discount P2P financing as a tool to diversify a portfolio. I think its already an asset class of its own - not sure about other conventional investors.
Necrox last edited by Necrox
@bursagoinglong Thanks for writing this article. I have also gone through your blog and read up your other posts as well and I find your analysis very interesting and in-depth.
Can I just get some advice from you, given you have so muchknowledge and exposures in investment, how would you actually build your portfolio? As I am seeing you have been promoting P2P quite heavily, but you have only invested RM2,000 in it.
Are you able to let us know your exposure of your total portfolio, reason? And so far how have they performed? This will actually help me to get some idea how should I managed my portfolio.
My portfolio is currently:
50% Global equities
I am a high risk investor, reason of my positioning is that I foresee there might be a market clash in near term, and hence i have positioned slightly more defensive.
Kizaru135 last edited by
@bursagoinglong Great article! Appreciate the advice shared and your detailed rationale in investing into P2P.
Given the importance of diversification, how much would you recommend investors to invest per loan? Minimum sum? Or does your investment per loan vary according to how you view the default rate of that particular loan?
I am trying to understand how to best increase my returns while maintaining a well diversified portfolio of loans.
@necrox Hi Necrox. I was testing the waters with P2P. The results are pretty satisfying. Hence, in the coming months, I'll be increasing my P2P portfolio.
Like you, I feel like equities are overpriced at the moment and is due for a correction. I will be staying invested in equities but won't be adding more into it.
I can't really comment on your portfolio because I'm not a qualified FA. However, from reading books etc, I reckon your investment assets (other than equities) should be easily liquidated in order for you to take advantage of purchasing more equities when the market drops.
P2P may not be easily liquidated because you're are committed for a certain term subject to the monthly repayment. That doesn't mean you can't take advantage of short term funding.
One thing I like about P2P is that it pays well.
@kizaru135 Hi Kizaru. My investment in P2P is only RM2000. Because it is so small, most of the time I only have enough to invest RM100 (the minimum required) per loan/note. That means about 5% of capital per loan.
However, if risk should be lesser or proportionate to reward, then you can address the reward issue first (never take more risk for a lesser reward) because P2P gives you a rough estimate of how much you may earn in a year.
Say, if you are intending a gain of 10% per annum from P2P. Then "risking" 5% of your capital may not be prudent especially when 2 defaults amounting to 10% may wipe out any potential gains for a particular year. Maybe consider lowering the percentage of your capital per loan. The lower the better but invest in more loans/notes. It would work out the same.
Hope this makes sense to you.
josephyiong last edited by
just a comment on reinvestment.. recently FS has been slow coz lesser and lesser financing being offered.. is FS facing some challenges now? FYI, fundaztic offers 4 - 5 notes almost every week.. hmmm.. hope anyone from FS could respond.
@josephyiong There is no shortage of issuers here in Malaysia. We get many financing applications a day, but in line with our company's commitment to growing safe, instead of growing fast, and keeping yours and other investors in mind, we are very thorough in our assessment. The negotiation takes additional time as our the credit committee often requests for additional information that the issuer will need time to provide, or negotiate additional risk mitigating measures to be put in place.
Rest assured, there are notes in the pipeline that will be published very soon. Subscribe to auto-invest as the investor base is growing and the notes are getting filled up faster and faster these days.
Hope that clarifies!
josephyiong last edited by
@fshappy ok.. good and prompt response.. well done. then i should be more patient coz definitely am favorable to quality than quantity. keep up the good work team! =)