The 5 mistakes I made investing in P2P loans and ETFs

Here are the biggest 5 mistakes that I made investing in P2P loans and ETFs to date:

1. Invest large amounts in a mad rush.

Not so much when I started investing, but more recently, I have found myself at times wanting to convert savings into investments as fast as possible to receive interest.

As a result, I invested in a rush and transferred the money into one of my existing P2P accounts for immediate investment. Often already the day after, I regret the hasty decision and wish that I had done some research and gotten the most updated picture of latest developments in the P2P market (new platforms, risk assessments, diversification, interest rates). This also applies to ETFs, where I often blindly add to my existing ETFs instead of comparing (performance, fees, currency).

Lesson learned: Give myself at least a week before I make a transfer and read about the latest developments (e.g. here). Follow the 4-cycle investment approach for larger investments.

2. Wrong approach to diversification: Confusion between loan originators and platforms

From when I started investing, it was important to me to diversify my investments across platforms as a measure of diversification. Given that one of the major risks of P2P loans is that an entire platform and/or a loan originator could collapse, I consciously distributed my savings across different platforms equally. Only later did I realize that while certain platforms have tons of loans originators (Mintos: 63), others only have a few (Grupeer: 14), and some only have one (Swaper: 1).

That means having invested 1000 EUR with Mintos, 1000 with Grupeer, and 1000 with Swaper, the risk is much higher with Grupeer and Swaper given their limited numbers of loan originators.

Lesson learned: Look at the number of loan originators and invest more in platforms with more and more diverse loan originators.

3. Invest in loans without buyback guarantee

An early mistake that I made was to invest in loans without buyback guarantee. While loans without buyback guarantee often have higher interest rates and some P2P investors say that the higher interest rates compensate for the higher default rates, I have made some bad experiences and lost some money by investing in loans without buyback guarantee.

Lesson learned: I only invest in loans with buyback guarantee

4. Got carried away with the fear of cash-drag and money lying around that is not invested

There’s a lot of chatter in the P2P community about cash drag caused by platform not being able to immediately absorb new investments and how every investor should be aware and avoid it.

If you are wondering what cash-drag is: If one invests 1000 EUR but only 800 EUR are immediately absorbed and the remaining 200 EUR are lying around waiting to be invested, this is referred to as cash-drag as the 200 EUR receive no interest.

To avoid cash-drag, I used to adjust my auto-invest portfolio until the remaining 200 EUR were also invested. Very often that meant changing the conditions that I had initially set (with the intention that those are conditions that I am willing to lend the money for) until the remaining 200 EUR were invested. Often that meant either accepting lower interest rates, longer loan periods, or loan originators with less ideal rankings (B-, C+, C, C-). At times I would even invest manually and pick loans by hand.

From my experience over the years, I have learnt that it is often better to have some money “lying around” waiting to be invested, than forcing that all money is immediately invested and absorbed. Platforms often add new loans in batches and within a couple of days or weeks the ramining money is absorbed and invested in new loans with the conditions that I want and initially had set.

Lesson learned: It is ok to have some money “lying around” in my accounts.

5. Invest in short-term loans

One of the biggest mistakes I made over the first 2 years of investing in P2P loans was that I almost exclusively went for short-term loans. Given that I wanted to be able to exit and withdraw my money quickly in case something goes wrong with the platform, I was certain that short term loans are the way to go. It turns out that I was wrong and there are no real benefits to short-term loans (rather some disadvantages). Most platforms have highly functioning secondary markets at which loans can be sold within hours at no cost. For example, after I had decided to leave Twino, it took me less than 24hrs to liquidate my portfolio and sell all my loans.

The disadvantage of short term loans is that every time a loan is fully paid back the money has to be reinvested. This often takes a couple of days, sometimes even weeks. That means, for example, a 20-day loan with 15% interest that takes 10 days to be re-invested, actually only pays 10% interest due to the time the money is lying around! Very often this is being referred to as cash-drag or time-until-money-is-reinvested.

The lesson that I have learned is to invest in medium to long-term loans (12–36 months) that guarantee high-interest rates over the long term. Considering that interest rates are expected to go down over the years, this allows me to “lock in” a high interest rate. And, in case I want to liquidate and exit, I can use the secondary market.