Good reads from around the Web.
There’s nothing like a heatwave to focus the mind on getting away from a hot laptop and into a cooling breeze…
Straight into the links today!
Have a great weekend.
From the blogs
Making good use of the things that we find…
Passive investing
- To tilt or not to tilt your portfolio – Rick Ferri
- How stock lending reduces tracker fees – Bogleheads Blog [Via Mike]
- Use Vanguard’s LifeStrategy funds to dodge emotions – Jean Chatzky
Active investing
- 10 fast-growing UK dividend growth stocks – UK Value Investor
- The thrill of the chase – Investing Caffeine
- Beware the risks of high-yield bonds – The Value Perspective
- Mental models from a co-founder of Pixar – Brooklyn Investor
Other articles
- Why one million lemmings might be wrong – The Escape Artist
- Is Mr Money Mustache ruining your marriage? – Mr Money Mustache
- Saving more is more effective than earning more – Dividend Mantra
- We live like kings – Simple Living in Suffolk
Reflective UK blogger special
- Advice to my former self – Under the Money Tree
- Thoughts on 30 years spent building a pension – DIY Investor (UK)
- Checking in on my financial freedom plan – Retirement Investing Today
- H1 2014 [active idiosyncratic] portfolio review – Wexboy
Product of the week: I’ve been a bit slow to mention that Zopa is offering a rate promise, whereby savers who lock their money away for five years will get an average return of 5.2% while those who take the three year option will get an average of 4%. Remember your money is now theoretically protected due to its Safeguard fund, too – although personally I still only allocate a portion of my funds towards peer-to-peer, just in case. More details on the Zopa website.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- Debunking Jeremy Grantham’s concerns – Swedroe/ETF.com
Active investing
- I prefer to keep things simple – Housel/Motley Fool
- Active funds that have gone to the dogs – Guardian
- Redwood: Investing against the grain in Europe – FT [Search result]
- Making sense of the mining malaise – Interactive Investor
Other stuff worth reading
- Is being rich worth it? – BBC
- The dos and don’ts of pitching for business investment – BBC
- Property rents increasing at twice the speed of earnings… – Guardian
- …probably explains first-time buyer numbers near-2007 high – Bloomberg
Book of the week: Passive investing author Mike Piper makes his living writing investing books, but the Wall Street Journal still teased out his favourites by his rivals. Mike recommends If You Can
Like these links? Subscribe to get them every week!
- Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [↩]
BBC link not accessible from UK,unless someone has found a workaround….
Monevator,
Really appreciate the mention! Saw all the traffic coming my way via your site today. I’m grateful for the support.
Hope you’re having a great weekend over on your side of the pond.
Best wishes!
“I’ve been a bit slow to mention that Zopa is offering a rate promise, whereby savers who lock their money away for five years will get an average return of 5.2% while those who take the three year option will get an average of 4%. Remember your money is now theoretically protected due to its Safeguard fund, too – although personally I still only allocate a portion of my funds towards peer-to-peer, just in case. ”
Well, let’s not forget that Zopa loans are callable. Most investors in Zopa have forgotten that, or don’t even understand what it means. Lending on Zopa is an option-writing strategy, and horribly risky because of that. The borrower will repay your loan when he can borrow more cheaply elsewhere; when interest rates rise, he most certinly will not let you off the hook.
Lending on Zopa is a good way for the risk-averse to get their faces ripped off.
@Jonathan — Ripped faces is a tad hysterical. 🙂 What you describe is quite true and indeed my Zopa account is regularly swelled by return of capital. But it’s near instantly lent out again at c. 4.5-5.5%.
I’ve warned about the asymmetry you describe in past articles on Zopa but to be honest I’m much less bothered now the Safeguard is in place. My old fear was a deteriorating loan book as crappier borrowers hung about and good ones redeemed but that in theory doesn’t matter now as your capital is supposedly protected.
Of course you can/will be locked into low rates when wider interest rates rise but that’s true of any fixed term savings.
Remember too lenders can generally exit early with Zopa via ‘rapid return’, albeit at a cost.
And all the above at 2% greater than bank fixed interest accounts paying 3% or so.
To me the chief way of getting anything like your face ripped off with Zopa remains loss of capital. That’s not impossible should the Safeguard backup be overwhelmed, hence my caution as above.
@ investor
I can see a big Mis selling scandal brewing in the whole crowdfunding/peer-to-peer lending market
Getting into that for a 2% additional interest margin really is just like picking nickels up from in front of a steamroller
@Investor
Thanks for the reply.
“Remember too lenders can generally exit early with Zopa via ‘rapid return’, albeit at a cost.”
Yes, but that won’t save you from the problem. If interest rates have risen, then the capital value of your loans will be marked down (“to market”) in order to provide the buyers of what you’re selling with a competitive return.
However, if interest rates have fallen, and your loans are providing higher returns than news ones would, ‘rapid return’ wil still only pay you the outstanding capital, less fee.
Rapid return is assymmetric — you lose on high rates, and you don’t win on low rates.
“Of course you can/will be locked into low rates when wider interest rates rise but that’s true of any fixed term savings.”
Of course, but with fixed-term, fixed-rate savings, you will win if rates fall, because neither side can break the contract. It’s a symmetric bet. The Zopa contract is different, because it’s assymmetric. The lender is locked to a rate; the borrower has an option to repay at any time. That’s why comparisons with fixed-rate savings contracts are dangerous — the two products are very different indeed.
The interest rate received on Zopa should be enough to compensate for the price of having written this call option, yet almost none of us investing in Zopa knows enough to price options properly. All I can see is that the borrower’s option to repay is worth more, the more volatile interest rates are. Predicting interest-rate volatility over the next five years is definitiely an “advanced topic” in finance, and I don’t know how to do it.
I’m certainly beginning to agree with Neverland’s LTCM-like comment about nickels and steam-rollers, even though my mortgage debt is only costing me 1% (floating) at present, and my Zopa loans are paying over 5%. Those two figures are not directly comparable, because of the implicit option.
Even that statistic is questionable, because the Zopa average is a bundle of loan contracts, where the low-paying ones are likely to persist for the full term, and the higher-paying ones are more likely to be called away from me, as borrowers’ credit ratings fluctuate, and they get access to better credit offers.
There must be a quant lurking in this forum that can work out the price of that option for you
I own a copy of The Concepts and Practice of Mathematical Finance, by Joshi, but the thought of wading through the Black-Scholes sections again leaves me cold, especially while the weather is hot!
It is good to discuss some of the intricacies of Zopa though – it is definitely not as simple as first meets the eye.
I wonder whether the real-world effect of these observations might just be a lower return than you first expected as opposed to a loss of capital? There does seem to have been a race to the bottom in terms of interest rates on Zopa but its hard to unpick whether that is something systemic in the way its loans are structured, whether its just a mirror of the base-rate, or whether peope are just getting used to the idea of P2P?
Probably a mix of the three.
The next phase might be a general rise in rates though as base-rates rise, but this will be slowed by the friction of lenders having to overcome the 1% fee on calling the load, which by the sounds of it is free for the borrower..
Looking back at a ZOPA email snippet – I see they are even calling their loans options now 😉
“Did you know that the world record for high fives in one day is 14,607? If you deposit funds today you could earn 5.2% in the five year option. High five!”
Another thing is the Rate Promise that they have been touting recently, does that mean ZOPA take the financial hit if a borrower repays and re-borrows at a lower rate? Or is there some small-print somewhere?
Love that article “I prefer to keep things simple” Great reads. Thanks for sharing these with us!
This is interesting stuff Jonathan, and I’m in agreement with much of the theory. (As I say I’ve highlighted that asymmetry in the past). It was just the “face ripped off” comment that I objected to. It comes across as Internet commentator hyperbole. 🙂
Those close to me who know the time/effort it can take to keep up on top of this stuff (remember there are many comments potentially appearing all over the site / past articles on any given day I have to consider) say I should just let that sort of thing go, or delete the comment and get on with life, but I struggle to do the former as when you create a website essentially to try to help people understand things, seeing stuff you feel (in your opinion as site owner) is misinformation on your site is difficult.
Equally, the rest of this conversation here is interesting for those who want to learn more about Zopa, as is often the case, so my instinct is only to delete rarely.
At the end of the day, nobody’s face is going to get ripped off from Zopa by a mild rise in interest rates, on loans with a term of 3-5 years. The duration is just too short. Bank rate at 3% in three years is probably aggressive, and that isn’t going to see anyone suffering anything too painful. In fact, they’ll probably continue to come out ahead of most conventional cash savers, unless the banks suddenly go crazy to win cash deposits and offering huge spreads over Bank.
Even then, lower than potential-in-hindsight returns on cash held for relatively short durations is far from face-ripping.
Sure if Bank Rate rockets up to 5% in three years (and retail savings accounts then offer perhaps 7%) then sitting in c.5% for the term is going to be painful in terms of opportunity cost, but you’ll still have the cushion of the extra income in the early years. Bank Rate of 5% in three years is extremely unlikely and will hit many fixed income securities (e.g. gilts) harder than Zopa savings.
Rate rises will come eventually but bond bears (and I have been one) have not done well at all for 5-6 years now. I’m certainly not betting on rates skyrocketing as more than an outlier scenario.
I personally have more sympathy for the ‘pennies and steamrollers’ line of attack because it’s capital loss that is the glaring risk with Zopa, versus conventional savings accounts. Why risk capital – even ‘safeguarded’ capital – for 2% extra return? It’s a very valid question, and it’s why I think 1-2% in Zopa is about the maximum I’d be comfortable with.
As for a miss-selling scandal, consumers seem to win those at the drop of a hat these days, so who knows, it’s possible. You’d hope (and take some *measure* of comfort from the fact that) the regulators did their homework when looking into allowing P2P in ISAs, but they’ve made plenty of mistakes before.
Overall I think Zopa is a decent bet for a small portion of my funds, but I agree the extra return is not free.
@DividendMantra — A commentator, ArizonaTrader, mentioned your site, which was new to me, and I liked what you’re doing there.
Hope to check in again soon.