The Investment That’s Better Than P2P Lending

This was my first ever Candid Opinion piece for 4thWay, published originally on 25th November, 2014. I've just updated it very slightly – mostly as an excuse to get the editor to re-publish it for me and give it some more attention.

This is a brief look at all your quality investment options, and showing you where peer-to-peer lending sits among all of that. I also wanted to make the case that there's one form of investment that trumps the rest. And – to be candid – it's not P2P lending.

The name 4thWay comes from the “4thWay to save and invest”. That's P2P lending. The three other ways are property, shares and savings accounts.

Of course, there are dozens of other ways, but those other three are the most commonly understood. (The founders wanted to call the website “3rdWay”, somewhat as in “boring savings, high-risk shares and the new, third way, P2P lending”. But apparently “third way” is already taken by the pensions industry.)

The six great investments that all people should consider

Those four ways can be split into six baskets:

Form of saving/investment	How you might use it
1. Easy-access savings accounts	For emergencies and expenditure in the next 12 months or so
2a. Fixed-rate savings accounts	When you have specific goals in mind over the next few years
2b. Inflation-beating savings accounts	If you're quick enough on the rare and fleeting occasions these are available
3. Buying your own home	To save on housing costs in the long run
4a. Regular investments using cheap, index-tracking share funds	Possibly held in a pension or other tax-efficient investment wrapper
4b. Peer-to-peer lending in a basket of 6-12 different accounts	Including IFISAs, if you're lending so much money that you earn over the tax-free £1,000 interest. This is for lower-risk investing than stocks.

All the above investments have two important traits in common:

• If you shop around, they're a low-cost way to get a fair return for the risks taken, especially when taking into account hidden costs.
• They're easy to understand relative to other investments, which means that you can balance the risks with simple, sensible strategies.

In addition, between these investments, you can create pretty much any spread of risk and reward you want. Indeed, you don't even need to use all of these options to do that.

Peer-to-peer lending lower risk than stocks?

There's no question in my mind that P2P lending is, on average, lower risk than picking stocks. This has only become clearer over the eight years since I originally wrote this article, as more evidence has piled up about P2P lending and money lending in general.

And this is despite returns of P2P lending comparing well to shares, having actually beaten most stock markets much of the time, while having no down years. (The stock market had many down years.)

But clearly it depends who you lend to and whether you'll ever accept crazy low interest rates.

In my view, it's the psychological risk that is probably the main difference, since it's our psychology while investing that usually costs people – including smart people – most of their gains.

If you lend through a few high quality P2P lending accounts, and compare that to a portfolio of stock-market trackers, I think you're more likely to panic and do the wrong thing with an index tracker, even though it's an excellent, excellent product for those of you who learn not to care less when the stock market falls 30%.

If you don't know, an index tracker or “stock-market tracker” is a fund that spreads your money across dozens or hundreds of stocks (or emulates doing so). These follow a benchmark, such as the FTSE 100 or STOXX Europe 600. Over the long run, investing regularly, you can expect to do just fine with a basket of trackers.

Funnily, despite the monotony of it, it's extremely well proven that you can expect to do considerably better with a tracker than the vast majority of professional fund managers over the long run. Even though managers are trying to outperform. And trackers are even better than the vast majority of private individuals who pick stocks themselves.

So what's the best investment?

The best investment is not P2P lending. It's not a stock-market tracker or your property. It's not even a government-backed inflation-beating savings account – which is rarely available and in most countries never available.

The best investment is all too often overlooked: it's you! Before you put a load of cash into anything, consider what you could invest in to develop yourself or your career. I mean doing a course or reading books to improve your knowledge, give you an edge, and break out your career and earnings. All while enriching your life with greater wisdom. After all, no-one can take your knowledge away from you.

Find the right personal path and that investment will give you an astounding rate of return for very little risk.

Read more:

The Right Split Between Savings, P2P, Shares, Property.

Peer-to-Peer Lending Vs Other Investments.

Peer-to-Peer Lending vs Bonds.