I realize that the topic of my past mistakes has been a little over-represented on the blog lately, but this time I’m going to keep it a bit more relevant to the theme (of investing) 😉 I promise I’ll be done talking about my mistakes after this one (yeah, right).
A couple of my friends and family members have asked my advice on crowdlending, since they learned of my involvement in it. I’ve thus been talking a lot about my crowdlending adventure lately, and figured I’d make a post out of some of that chatter – in the hopes that others might benefit from it.
So if you’re new to crowdlending, and are considering boarding the train (or just curious about my past escapades), here’s some examples of what NOT to do when entering the crowdlending scene 😛
Lesson #1
Be sure to research the different platforms thoroughly, before you start to invest with any of them.
When you have selected your favorite platform(s), do not use your bank to transfer funds to the platform. Use a free service, like Revolut. – So actually, the first step you should do, is familiarize yourself with your favorite money transferring service, prior to selecting a platform.
I made the first handful of wire transfers via my bank, and while the fee was modest, it was still a fee that could have been avoided, had I spend a little more time investigating alternative money transfer solutions (I actually started out with TransferWise, but I never got around to use it, as it somehow seemed too cumbersome).
It was all new and overwhelming to me, so I felt “safer” using a (SEPA) bank transfer. If you feel the same way, consider holding off for a few days on your crowdlending adventure, because you’re obviously not ready yet 😛
Lesson #2
When choosing your favorite platform(s), make sure you consider rule #1 of investing (which one is that again?). Diversify.
With each platform you enter, consider how the properties/features of this particular platform compliment your current portfolio. Try making a plan! If you start out with Mintos (most opt to start here), which platform should be your next choice?
- Another (proven) P2P-lending platform with auto-invest and buyback guarantee on (most) of the loans (like eg. RoboCash or Swaper)?
- A new P2P lending-platform, with some- or most of the features that Mintos offer (like eg. FastInvest)?
- Another unproven P2P-lending platform with none of the above features? (Like eg. insert-your-favorite-new-p2p-platform-here)
- A proven crowd-investing platform with a secondary market (like eg. Crowdestate)?
- A proven crowd-investing platform without a secondary market (like eg. EstateGuru)?
- An unproven crowd-investing platform with no secondary market, but with buyback guarantee (like eg. Grupeer)?
- An unproven mixed crowd-investing platform with no secondary market (Like eg. Crowdestor)?
Anyway, my point is – do your due-diligence before you start investing with anyone, and make sure you consider your risk tolerance before anything else. How much risk are you willing to take? 😉
Lesson #3
Diversify your loans within the individual platform(s).
Looking back, I started out way too aggressive on the first couple of platforms. If I were to re-do it, I would pick 10 platforms, transfer €1000 to each and invest a maximum of €100 in one loan (€10 for the P2P platforms like Mintos). Had I done that I would have a serious amount of cash-drag right now (as platforms like Bulkestate, Crowdestor, Grupeer and Envestio typically doesn’t launch more than 1 project per. month), but I would be a lot more diversified than I am now (I’ve got more than €1000 in a single loan on several platforms).
With the strategy outlined above, I could lose 1-2 loans per platform, and still be back in the green after a little over 2 months (at my current dividend levels). Loosing an entire platform would lose me €1000 obviously, and that would take more than 1 year to recover from. But such is the risk of crowdlending 😉
I’m predisposed towards symmetry, so my perfect crowdlending portfolio would look like this:
I know, it’s odd, but somehow my predisposition towards “order” have never steered me wrong, so I’m going to hold on to that preference for now 😉
But this is MY perfect strategy (because I’m lazy and slightly autistic). What YOU should do (because you’ve already learned from lesson #2) is assign each platform a risk category – something like High, Medium, Low, and then distribute your funds out evenly, according to your risk profile. It could be something like this:
| Platform | Risk rating | Portfolio allotment (% of Total) |
| Platform 1-2 | Low | 50% |
| Platform 3-4 | Medium | 30% |
| Platform 5-6 | High | 20% |
Remember that crowdlending as a whole is to be considered a high risk asset class, so even the “Low” risk category is technically still high risk 😉
So that’s what you should do, if you’re hardcore. Of course this strategy is relatively time consuming, as you’d quickly find that the High-risk platforms would grow out of its 20% allotment (as these would/should have the highest yield), so you’d constantly have to re-balance your portfolio to stay within your desired risk profile. Also, platforms that are considered new and unproven today, will (hopefully) become solid and well-proven over time, which would require you to re-evaluate each platform on a regular basis (and consequently bump it down on the risk scale). Nobody said it was going to be easy – Hence, my lazy approach 😀
So there you have it, folks! That’s all the wisdom I wish to bestow upon you today, my dear readers.
Until next time.
What’s your biggest (investing) mistake(s)? 😉
Guys, be aware of P2P platforms, especially the big ones playing aggressively. The interest rates they offer are good, but the worse part is that the underlying risk is way too big and covered in a shadow. If you look at it deeper it looks a lot with a nicely dressed Ponzi scheme.
Indeed. And so it seems a few of them has already been outed as being just that…If it sounds too good to be true
Excellent Nick! If I had to start from scratch I would also split the money into several platform equally, instead of having 15k in Grupeer and 2k in Mintos… as an example. The good thing is that I only have 20 or 30 more years to rebalance it properly, hehe.
I like the idea of categorising platforms by risk levels and percentage portfolio allocation.
Yea, you’re on most of the same platforms as me 😛 I hadn’t noticed until just now.
According to P2035 it won’t matter how we diversify across platforms anyway. They’re all gonna perish eventually 😛
Food for thought! 🙂
That’s a good one Nick! Great suggestions. Hadn’t heard of Revolut so definitely going to try that out as I expect to make quite some transfers to various platforms this year.
I am not too worried about investing funds in these asset classes. As you say, it is really about risk tolerance. My risk tolerance will change over time and make me reconsider my allocations, but for now I am willing to give it a go. And I will give myself a break and won’t aim for perfect symmetry 😉
Hi Marc, I figured you might enjoy it 😉
You should rename your blog to Mr. Risky Pants 😛
‘Mr Pants on FIRE’ is way better 😉
Thanks for sharing your first hans expirience in p2p, these are the most valuable but hard to find. What relates to investin #1 rule, yes diversification is important, but more important and I would say #1 rule is dont invest in what you dont understand. If you will you will end up going with latest trend and investing in hype bubbles like cryptos. We all know whete bitcoin milioneres right now 😉 Same thing happin over and over again but with different asset hypes starting with tulip case in 17th century. I bet stuff happined sice the stone age before just was not documented that well. What relates to p2p im sceptical about the investment in general. I think its a bas tool created to lend money with big interest to people who shouldnt get lended at all. These are people who cannot get a bank loans. Simple question. Why? Why they borrpw for 20% 30% or more. We are in economy growth cycle right now and such p2p are ok in general, but when things will turn ugly then p2p bprrowers will be the ones to default first ans most of platforms will default as well. But for now it is a good return and should be for 1-2y more, but personaly I prefer to stay away from this investment. And sleep well with my boring dividend stocks with 3% return 🙂
I agree with you to some degree, but I have to say, I’m fairly confident that the crowdlending scene is here to stay 😉
Do keep in mind, that not too long ago (less than 30 years), people willingly paid (they didn’t have other options) 15-20% on their mortgage loans in the bank! 😉
The times have changed. The world has changed. There are many different types of crowdlending/funding, the most common/wellknown being p2p, which is typically car loans/consumer loans/invoice financing/smaller business loans. Interest of 10-15% is equivalent to the interest rates in the banks in the 90’s. So really, there’s always been people around, willing to pay these interest rates. The world is build on debt and consumerism. I’d really prefer that it wasn’t (because it’s obviously not sustainable in the long run), but since it is – I might as well capitalize from it 😛
The other type (that I primary invest in) is the bridge-loans with a typical interest rate around 12-14%. I don’t think that’s exorbitant really. But hey, as long as we sleep well at night with whatever investments/assets are in our portfolio, that’s really all that matters 😉
I see your point, but the question is why people of companies take p2p loans for 10-15% ir they can get 3-5% same loans at the bank. The answer is that banks dont lend to them. I doubt that people or companies are that dumb to take loand with x3 interest just because it is more comfortable. Micro loans, maybe, this could be the field. Im not saying its bad, im just saying it is very risky and if recession hits these are the most exposed loans. I think banks are happy that p2p platforms are takiing all the shitty projects and customers 🙂 I think that risk/reward in p2p is undervalued now when all is good and economy is growing and defaults are minimal.
I honestly think banks should be concerned. It’s only a matter of time, before someone like Mintos gets a european banking license, and start really hogging clients from the banking sector 😉
But yes, you’re right – it’s likely that 1-2 of the most risky platforms are going to go belly-up, if the shit hits the fan.
Regarding the bridge/building loans it’s fairly simple, really. If you have a plot of land, and want to build a building on it, you go to the bank. The bank says you can borrow the money at a 5% interest – as soon as there is a building on the plot. You then go to a real estate crowdlending platform, and take out a 12 month bridge loan at 12% interest rate. You then take that money, build a building in 12 months (give or take). Once the building is complete, you go to the bank and get that 5% loan and bam – you pay off that 12% crowdlending loan 😉 If the platforms do their homework, only quality projects will ever make it onto the platform. This business concept is pretty straight forward, and not difficult to understand (in my mind) 🙂
Well as I has the chance to work with bad bank loans after 2008 have to say what you are saying about land plot developement that was the biggest loss for the banks. such half build buildings are the most common distresed asset in the recession so I would bet that you will lose 1/2 of the portfolio when shit will hit the fan. You are financing the most risky tipe of re development. Is there any platforms that invest in small offices? I think that one would do best in recesion. No wonder banks say no to land plot development after 2008. That were the loss came from then.
Ou and see one very impostant factor re your 12% return – it has to be developed and refinances. That is the key. When people will stop buying apartments banks will stop refinancing such loans. Im not saying it is possible im saying it happined in 2008-2009 and I bet it will happin again. Maybe not in 2019 maybe not even in 2020, but if it will such projects will hit the dirt 80-90%. Been there seen it. And the clasis thesis this time it will be different, no it wont 😀 Sorry for being such negative ass re p2p but im just seeing how people are stepping into risky investments thinking that they will earn 12% and have 1-2% of defaults for ever. Its not going to be that way. It will not. I would start decreasing p2p portfolio if I were you. Its ok right now and it might be ok for another 1-2y but the end of the cycle is comming.