Tuesday, July 31, 2007

Asset diversification and P2P lending

I just came across an article written yesterday, Nervous Equity Investors Should Consider Zopa Lending, which argues that the time to invest in P2P lending is now based on market conditions. Personally, I'm not sure the P2P lending market is something you can time. However, the article does make a good point - P2P lending is a new asset class that does not move with the equity markets. Here are some excerpts from the article:

Wobbling stock markets and rising interest rates make now a perfect time for equity investors to reduce and spread their risks by investing in prime unsecured lending via Zopa.

Zopa (zopa.com) - the world’s first marketplace where people meet to lend and borrow money – says the current climate for private investors is creating the ideal time to consider lending on Zopa. As interest rates rise, markets are feeling a ‘credit crunch’ that is causing stock prices to fall – and investors to suffer. However, those same increasing interest rates have made lending on Zopa more attractive than ever, with recent rises helping the average return to lenders to pass the 7% p.a. mark. Some members lending to higher risk borrowers (but still very much prime market borrowers) are enjoying returns of more than 10% p.a.

....Giles Andrews, Managing Director of Zopa UK said, “Zopa lending has been attractive to private investors since we launched more than two years ago, offering far better returns than cash-based products but at only marginally more risk. With stock markets looking far from rosy currently and interest rates generally on the rise, Zopa lending has never been a more valuable alternative. Investors looking for safer and more secure returns on their money at rates well in excess of cash products should give Zopa a serious look right now.”

Others have made similar statements about how P2P lending is a whole different asset class. Prosper CTO John Witchel has said that Prosper is unique, "There is nothing like it in the marketplace and it is essentially a new asset class." Roger Steciak, who wrote Happy About People-to-People Lending With Prosper.com: How to Lend Money to Friends You've Never Met said, "I consider people-to-people lending to be a new asset class and I want to allocate a small portion of my net worth to it for diversification."

Matt, in his article about the effects of a recession on Prosper recommended, "...don't put all of your investment money into any one asset class. You should start with an emergency fund in something like a money market or savings account that can be easily accessed if needed for an emergency. Then any remaining money can be diversified among several different asset classes - stocks, bonds, real estate, foreign markets, and Prosper. The allocation percentages should be based on your risk tolerance and investment timeframe. The longer term (10+ year) money can have a higher percentage in stocks, the mid-term (5-10 year) money can have a higher percentage in Prosper, and the shorter term (<5 year) money should be mostly in cash accounts or bond funds."

What do you think? How much of your investment should be allocated to an asset class like Prosper? Should the amount allocated change based on market conditions?


Matt said...

Right now I have about 5% of my investment money in Prosper. If it had a secondary market that would provide easier access to the money I would probably increase that to 10%. If I could wrap it inside of an IRA to make it more tax friendly I would increase that to 15-20% of my investment money.

Anonymous said...

The "new asset class" aspect of Prosper is what brought me here in the first place.

Furthermore, I believe too many lenders are running from Prosper after basically one year of results. Hey, every asset class has a bad year once in a while.

Furthermore, if the aggregate Prosper ROI are used to measure the return on the entire asset class, then the first year is likely to have poor returns because it includes returns during all lenders learning curves. I feel very comfortable blaming my own subpar returns in 2006 on my learning curve, and I expect to perform much better compared to the aggregate of Prosper users in 2007. Each passing year will include fewer and fewer newbies, thus decreasing the newbie-effect on the aggregate returns.

Matt said...

I definitely agree. There were a large number of loans being funded in the first few months of Prosper's existance. As more data is available to lenders and lenders become more experienced I would expect that the overall returns should improve.