With the stock market down almost 20% from its April high one has to wonder how this will impact peer to peer lending. While the down market is certainly not good news for anyone with money in equities, I am guessing the management at Lending Club and Prosper are quite happy with the latest stock market gyrations.
Since the 2009 lows the stock market has steadily rallied and those who stayed the course have seen their portfolios grow significantly. But the crash of 2008-09 is still fresh in investors’ minds and many people who have come back into the market in recent months are likely questioning their decision to do that now.
Where to Invest?
For people taking money out of the stock market where do you go? Yesterday everyone was flocking to gold as well as bonds, but these are also volatile investments. Sure you could keep it in a CD or money market account and earn next to nothing in interest but at least you will not lose any principal. I imagine that is what the majority of people are doing who are sick of experiencing the volatility of the stock market.
But some people will do some research looking for alternatives and discover p2p lending. Lending Club had a great deal of press coverage last week with their new funding round and high valuation and some investors may go back and revisit those articles. And Prosper also recently had a funding round and continues to provide outstanding returns for investors. Now, neither company will share these numbers publicly but I expect this week would be an above average week for new investor signups at Prosper and Lending Club.
P2P Lending Provides Steady Investment Growth
With a well diversified p2p investment portfolio you should never experience wild fluctuations in your holdings like you do in the stock market. I have been investing in p2p lending now for two years and in 23 of the last 24 months the total value of my portfolio has increased. My one down month was near the start of my investing when I didn’t know what I was doing and I made a big mistake of investing in a small number of notes and I had a $250 note default.
Now, with well over a thousand notes it would be virtually impossible for me to have down month again. With a total portfolio of around $100,000 (split across six accounts at Lending Club and Prosper) it is steadily growing at $750 – $1,000 every month. Try and achieve that with a stock market portfolio.
Borrowers Are Still Looking For Loans
It is no good to have more investors coming to peer to peer lending without a corresponding increase in borrowers. But there have been signs in recent weeks that borrower activity is picking up throughout the economy as referenced by this article from Friday by the Associated Press (hat tip to Ken from Lendstats). Consumer borrowing is at its highest level in four years and I would say that is good news for p2p lending. Some consumers will be turned down by banks or be looking for alternatives to credit card financing. Some of these people will discover borrowing money with p2p lending.
The Future if Uncertain
I have no idea where the stock market will be tomorrow, next month or next year. While there are no guarantees, I am confident that I know (within a certain range) the approximate value of my p2p lending investments tomorrow, next month and next year.
Now, I am not liquidating my stock market holdings any time soon, and I am not suggesting others should do that. But I will continue to put new money to work in p2p lending. I like, not just the great returns, but the low volatility of these investments as well.
What do others think? Have these latest stock market gyrations influenced any of your investment decisions. As always, I am interested to hear your comments.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.