The greatest fear of any investor is to lose a lot of money, if not even all.
It is one of the reasons why some people put off investing, or invest at lousy rate well below inflation, missing out on great income opportunities.
And it is why so many people prefer to invest in housing – in most countries and cultures globally a house is considered a safe bet, a must have.
Stock market and housing market crashes are one of the topics media love to cover, banking on people’s fears of losing their hard earned cash, and maybe even their pension.
We’ve lived through a few financial crises in the last few decades:
- Brexit – history in the making
- The 2008 global recession (watch The Big Short to understand why it happened)
- 9/11 and the subsequent financial crisis
- The Argentinian government default in 2001
- The dot-com boom that culminated in 2000
- The housing market crash in the UK in the 1990s
The two personal risks of a bad investment
An investment goes bad then, well, you lose some or all of your money.
However there is another more personal risk – not being able to access your cash for unforeseeable reasons, leading to cash flow problems for you and potentially a few more people, but not all. You will (probably) get your money, just not now or when you need it.
This is the situation I am currently in with Funding Circle. I opened my Innovative Finance ISA with them over a year ago and enjoyed healthy returns.
I should have pulled it out earlier this year when loans defaults grew disproportionately and even the FT.com reported on their troubles, but then it started to get better again. Till two months ago. Their stock crashed (see chart above) and selling my loans and withdrawing my funds is turning into a painstaking and unnerving task.
You see, the stock market is so large that if a stock you hold goes down, chances are you can probably still sell it, just at a lower price. But with Funding Circle now the funds being liquidated are so many and the overall pool so much smaller than the stock market, they are struggling to find buyers at all.
They state on their website that people wanting to sell during the last week took an average of 92 days to do so. 92 days!!! That is over 3 months!! And what they don’t say is how much on average every person was wanting to sell, and if the sell order was sold completely or in part.
Before investing I had, of course, done my homework – including a test withdrawal which took 2 working days to clear. I know that if they go bust I am covered for all my amount invested as it is below the £85,000 guaranteed by the FSA in the UK. Then again I’d much rather spend time chilling with my family than fighting over compensation of a business I used to trust.
Because trust is the most precious currency in investing.
You don’t invest in a business (or stock or property or person) you don’t trust.
Are all peer-to-peer lenders having difficulties?
No, from my research only Funding Circle is having a tough time. It is still a fairly new industry which relies on having large sums of money floating around. Their company strategy is to increase the amount of lenders and borrowers, in competition among P2P lenders and banks alike.
Is Brexit part of the problem. Probably.
Will it get worse? Yes is my educated guess.
Will a P2P lender go under? Sooner or later one probably will, as is the case in any industry.
I do hope it will not be Funding Circle, at least not before I get my money out. It would be one less headache.
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