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What caught my eye this week.

The IT Investor has a honeypot of a post up this week for active investing junkies. He’s dived into his investment trust data to sieve out what he’s calling ‘double doublers’ – investment trusts that doubled their share price in the first half of the last decade, then did it again in the second.

It sounds spectacular – it is – but qualification requires ‘only’ about a 15% return a year. You could have got a slightly better return from a US S&P 500 index fund, and many passive investors did.

The best double doublers did even better though, and the result is catnip for an active investing sinner like me. (Reminder: it’s my co-blogger The Accumulator who is Mr Passive).

Here are IT Investor’s top five double doublers:

What’s particularly galling is I owned four of these five trusts at some point in the last decade – but I hung on to none of them for anything like ten years.1

The curses of active investors are indeed many and various. They’re not just down to the fact it’s a zero sum game, which guarantees net disappointment for average pot of money, after costs and fees. There’s also the way that even when you get it right, sooner or later it turns into wrong.

How so?

Well maybe you sell too soon. Or maybe you realize you should have bought more. Or dozens of variations on the theme. Stock picking is not a hobby for anyone who occasionally brings a box of old love letters down from the attic to tearfully wonder what might have been.

But it’s not a game for those who wouldn’t even keep the letters of their old flames, either. If you’re that rational, buy the market!

I did it my way

Despite all this, until we grow bored or are physically restrained, some unfortunates like me will always be there to continue the quixotic quest of trying to beat the market. If you want more ways to understand why, Robin Powell tackles the subject in a guest post on Humble Dollar this week.

Robin cites Meir Statman, a finance professor at Santa Clara University, who gives several good (/bad) reasons including this particular bugbear of mine:

Many investors, Statman says, frame their returns relative to zero, rather than relative to the market return — the performance they could have earned by investing in a low-cost index fund.

“A 15% annual return is excellent,” he says, “but it is inferior when an index fund delivers 20%.”

It’s been at least a decade since I’ve taken seriously any active investor who doesn’t benchmark properly. Yet go to a meet-up and you’ll find they abound.

Perhaps that’s because as the wonderfully-named Professor Statman says, many of us:

…need to feel that we’re better than average.

And nobody active investing to that end wants a number telling them otherwise!

Have a great weekend.

[continue reading…]

  1. I currently own only Lindsell Train off this list. []
How pensions will help you reach financial independence quicker than ISAs alone post image

This is part two of a series on how to maximise your ISAs and SIPPs to achieve financial independence. Part One explained why you shouldn’t just target a single Financial Independence ‘number’ when you need to make the most efficient use of multiple tax shelters.

Most people, young and old, should exploit their personal / workplace pension options, from SIPPs to Master Trusts, even if they’re aiming for rapid financial independence.

Before I explain why, a quick reminder:

  • ISA money is taxed before it goes into your account but not when it’s withdrawn.
  • Pension contributions are taxed when withdrawn, but not when they’re put in.

I’m simplifying a little, but essentially that’s the case.

The timeliness of taxation offers no advantage to either ISAs or SIPPs.

An ISA that taxes you at 20% on the way in and 0% on the way out would leave you with exactly the same amount invested as a SIPP that taxes you at 0% on the way in and 20% on the way out.

The maths makes no difference to your investment returns if the tax rates are the same, as The Investor has showed.

But SIPPs beat ISAs and LISAs because the tax rates are not the same.

The comparison below is the simplest way I can think of to illustrate.

Why SIPPs beat ISAs and LISAs for maximizing post-tax returns

In each of the following scenarios, the number in pence is what you have left from £1 gross – once tax is deducted on the way in and/or on the way out.

ISA savings – Basic Rate taxpayer

Each £1 is first taxed at 32% (20% income tax + 12% National Insurance contributions):

£1 x 0.68 (32% tax on way in, 0% tax on way out)

= 68p left

Your ISA leaves you with 68p for every £1 gross you contribute. (Remember, we can ignore investment returns because they will be the same for every account in this comparison, and the timeliness of taxation makes no difference.)

SIPP savings – Basic Rate taxpayer

Each £1 is first taxed at 32% (20% income tax + 12% National Insurance contributions):

£1 x 0.68 (32% tax) = 0.68

But there is tax relief:

0.68 x 1.25 (20% tax relief) = 0.85 (85p is left from £1 gross on way into SIPP)

£0.85 x 0.85 (15% average tax paid on SIPP income after 25% tax-free withdrawal and 20% Basic Rate tax paid on the remaining 75% of income) = 0.7225

= 72p left

So the SIPP leaves you with 72p on the £1, whereas the ISA leaves you with 68p, in a comparison I deliberately skewed against the SIPP.

How skewed?

Well, in reality some of your SIPP income will be withdrawn tax-free using your Personal Allowance (PA). I also haven’t factored in the benefit of salary sacrifice or employer contributions. (I appreciate they’re not available to everybody).

SIPP savings – Basic Rate taxpayer, including Personal Allowance

The SIPP advantage improves dramatically when you account for tax-free Personal Allowance withdrawals of income.

£1 x 0.68 (32% tax) = 0.68

0.68 x 1.25 (20% tax relief) = 0.85

£25,000 income withdrawn from SIPP:

£25,000 x 0.75 (after 25% tax-free withdrawal) = £18,750 taxable income

£18,750 – £12,500 (Personal Allowance) = £6,250 taxable income

£6,250 x 0.2 (20% tax) = £1,250 tax paid

1,250 / 25,000 x 100 = 5% average tax paid on income

£0.85 x 0.95 (0.85 is left from £1 gross on way in, 5% tax average tax paid on way out)

= 80p left

In this scenario, the 80p you get out of a SIPP is worth over 17% more than the 68p dispensed by an ISA. Mileage varies depending on how much you withdraw from your SIPP in any one tax year.

The effect of National Insurance is also interesting here. Tax relief examples generally show 80p being grossed up to £1, or £1 being grossed up to £1.25, to show you how 20% tax relief works. (Just multiply your net figure by 1.25). But much depends on how your pension contributions are deducted.

In a scenario where every £1 gross is down to 68p by the time it hits your bank account, after income tax and National Insurance, then things don’t look quite so good. Put 68p into your pension, multiply by 1.25 and you’ve got 85p. That’s much better than an ISA but salary sacrifice – which enables you to sidestep National Insurance – is a powerful benefit if your workplace offers it, and if your pension contributions would ordinarily be taxed at the Basic Rate or higher.

SIPP savings – Basic Rate taxpayer, including salary sacrifice and PA

Here’s the same scenario again boosted by salary sacrifice:

£1 x 1 (salary sacrifice = no tax on the way in)

£25,000 income taken from SIPP:

£25,000 x 0.75 (after 25% tax-free withdrawal) = £18,750 taxable income.

£18,750 – £12,500 (Personal Allowance) = £6,250 taxable income

£6,250 x 0.2 (20% tax) = £1,250 tax paid

1,250 / 25,000 x 100 = 5% average tax paid

£1 x 0.95 (£1 gross on way in, 5% tax on way out)

= 95p left

Lordy! Now your SIPP funds are worth 40% more than your ISA’s at 95p vs 68p on the £1.

And we still haven’t thrown in employer contributions – in short, just bite their hand off whenever available.

Wealth warning Salary sacrifice can leave low earners out of pocket, and it has wider ramifications for other employment benefits. Check this link for more on salary sacrifice and pension tax relief in general. Salary sacrifice can also be a quagmire for high-earners colliding with the tapered annual allowance. That’s a whole other kettle of articles.

I won’t bore you with all the permutations but here’s another couple of useful examples:

If you took a £50,000 SIPP income in the above scenario, you’d still have 90p on the £1.

Take £50,000 and you’re left at the top of the Basic Rate tax band on £37,500, after deducting your 25% tax-free withdrawal. Deduct another £12,500 for the Personal Allowance and only £25,000 remains taxable at 20%. £5,000 tax divided by £50,000 income means you pay an average tax rate of 10% – leaving you with 90p on the £1.

A Higher Rate taxpayer is left with just 58p on the £1 from an ISA.

What about a Lifetime ISA?

LISA savings – Basic Rate taxpayer

£1 x 0.68 (32% tax on way in)

0.68 x 1.25 (25% gov boost) = 0.85 (0% on way out)

= 85p

LISAs are good for saving for a house but are generally worse than SIPPs as a retirement savings account. You can’t access it until age 60 for retirement without taking a 25% penalty charge, and personal pensions also trump LISAs when you consider inheritance tax, means-testing, and bankruptcy scenarios.

If retiring before the minimum pension age (when you can access your personal pensions) means putting everything you can into your ISAs then forget about your LISA.

If you want to create more tax-free income from age 60 and you’re maxing out your pension’s Annual Allowance, or are worried about hitting your pension Lifetime Allowance then LISAs come into play.

Defined benefit (DB) pensions add another level of complexity, and now is not the time to get bogged down in it. Ultimately DB pensions take pressure off your personal pension, and hopefully the series will give you enough knowledge to see how they fit into your own plan.

There may be some people who discard personal pensions because they aim to retire extremely early, or some other unusual circumstance applies.

But most people will be better off using a personal pension to fund much of their later life from the minimum pension age on.

In the next post in the series, I’ll explain how to work out how much you need to put in your ISA versus your personal pension to hasten financial independence.

Take it steady,

The Accumulator


Weekend reading: Pre-apocalyptic budgeting blues

Weekend reading logo

What caught my eye this week.

Unlike every other personal finance blogger around, I’ve started 2020 wondering whether it’s time I spent more money.

Definitely not going bananas – financial independence is too precious a salve for that!

But making little effort to further grow my wealth.

This is a novel thing for me to consider. Saving comes naturally (genetically?) to me. I’ve mostly left The Accumulator to write posts about mental fortitude and so on, because I’ve no great insights in this area – I just do it. Being in the black has been normal for me since I was eight or nine. I often have to strain my powers of empathy to understand why anyone with a reasonable job and no dependents is different.

And so for decades I’ve occasionally amused myself with compound interest. Even sleeping overnight in a hospital when my dad was in intensive care – and the financial crisis raged abroad – I’d plug in my numbers like some comforting ritual, to see what ludicrous rate of return I needed to catch up with Warren Buffett. (I was also reading The Snowball. And no, I’ve not caught-up!)

So what’s changed?

Well, it’s not that I think we’re doomed to low returns from equities for valuation, or other market timing reasons to act. I don’t see any great evidence for that, provided you’re globally diversified.

And I couldn’t give two hoots about a run-of-the-mill bear market.

Perhaps it’s just getting older? Childless friends my age are forever traveling, urging that you can’t take it with you.

Maybe it is just middle-age? There was a story going around on Bloomberg this week that mid-life misery peaks at just over 47. I’m within shooting distance, but that sort of estimate is usually tied to responsibilities I don’t have, like sleepless children.

Still, I do suspect it’s the ‘years’ field on my old friend, the compound interest calculator, that has set me off.

Because, frankly, when I look around at the world today, I’m more hesitant about entering another 40 years into that box.

Woe is me

Stand down that “actually…”, my friends…

As someone who has often sent people Hans Rosling’s infamously positive TED talk about how the world is getting better – and who regularly includes similar graphs in this round-up – I’m well aware many indicators are going the right way.

I also notice exciting progress in my active investing forays. Genetics-based biotech and the coming-of-age for renewables are two exciting areas to watch.

But I wonder if it’s too little, too late?

Recent politics doesn’t help my mood, obviously. One reason for sharing those hopeful graphs is all the debating with people – left and right – who have become openly scornful of the systems that brought us peace and prosperity – capitalism, markets, a social safety net, international cooperation. See Brexit and Donald Trump for more.

Politics also matters because we’ve had a gun to our head for six decades, and yet nobody talks about nuclear war anymore.

My feelings on nuclear weapons are summed up by this quote attributed to Bertrand Russell:

 “You may reasonably expect a man to walk a tightrope safely for ten minutes; it would be unreasonable to do so without accident for two hundred years.”

When you look at the glib nationalism now prevalent in the UK and the US – and the renewed posturing of Russia and, arguably, China – you can’t help remembering we’ve already been balancing on that tightrope for quite some time.

And then there’s the environment.

Again, not a novel concern – see my post from 2010 on why environmental degradation is the biggest thread to your long-term wealth.

But honestly? I thought I’d probably easily make it out before a true collapse.

If anything I’d become less militant on that front. I’ve got no kids, so why was I curbing my short-haul flights and offsetting carbon via a share of fresh woodland I bought? My friends were constantly in the air with their two or three children who would inherit the results.

Maybe the Australian bush fires are a wake-up call? Evidence has been abundant for years – as a once would-have-been marine biologist I’ve long read about coral reefs dissolving from ocean acidification with dismay – but the Aussie footage is ominous.

Finally, I’ve also just read Dan Carlin’s The End Is Always Near.

As a fan of Carlin’s podcasts I’m familiar with his dour take on the murderous and careless nature of human beings. But you’re whacked over the head with it in his book. It’s hard not to conclude we’re living on borrowed time.

If I told you Carlin wonders whether intervention by an alien caretaker might be one of humanity’s best and only shots, you’ll get the picture!

Enough is enough

The other day I mused whether a Plan B was required in case the politics in Britain continues to deteriorate towards irrationality. A bug-out escape option, maybe, to some more hospitable political climate.

Many readers engaged with the idea. A few said I was being ridiculous or irresponsible for ‘predicting’ such a thing.

Let’s try the maths again, eh?

I’m guessing there is a 5-10% chance of this bug-out option being needed – up from ‘negligible’ 20 years ago. So I’m estimating at most a one-in-ten chance. In other words, I ‘predict’ that nine times out of ten the UK won’t reach this sorry state. That is not a forecast of certain or even likely disaster.

The point is even a small chance of a truly dire outcome is worth insuring against, however. It’s the same reason you insure your house against it burning down, though that’s never happened to anybody you know.

Unfortunately there’s no good Plan B against a global catastrophic dislocation – nuclear war, environmental collapse, the singularity, or perhaps a global pandemic – except to get your business done beforehand.

That is, to spend more money.

You can’t save the world

Before anyone asks (thanks in advance!) I’m feeling fine. I’m looking forward to the wedding of an old friend tomorrow, and I have an interesting date lined up for Sunday.  I do suffer from SAD a tad, but that’s nothing new.

These Weekend Reading posts are a chance to range more widely beyond asset allocation, ISAs, and SIPPs. And I have found myself pondering whether an uptick in living for today might be a rational response to how I see things have been progressing.

Wealthy people are living for longer, and we’ve written before that a retiree at even 65-years old should ideally have a plan that can see them out for 30-40 years.

However not all those years will be healthy, and that raises difficult questions when planning. For instance, should you spend more money on travel when you’re early into retirement? Or should you save more for later, when you may need care?

Very few of us consider the healthy life of the societies – or even the planet – when making such calculations.

That’s a luxury we take for granted. Few societies (including our own) have gone as long as the UK has without some major disruption, be it war, famine, plague, or revolution.

Globally of course the planet has always come through, but from Easter Island to the Mayans to most recently the likes of Egypt, the demise of local natural life-support systems has caused unrest if not extinction.

It’s a bleak subject.

Optimists make the best investors, and that’s the hat I’ll continue to wear when investing.

But as a saver?

Maybe it’s time for some pessimism.

[continue reading…]


Get £20 for free by signing up to RateSetter

Mixing RateSetter’s £100 bonus offer and high interest rates should deliver a tasty return

Important update 23 January 2020: The offer described in the article below has now ended. There’s a new offer though! You can now get a £20 bonus when you sign up via my link to RateSetter. That’s less than before, but the good news is you only have to deposit £10 to get this £20 bonus. I will also be paid a bonus by RateSetter if you sign up via one of these ‘refer a friend’ links. This doesn’t affect your returns – it is paid by RateSetter.

I won’t cause any readers to fall to their knees screaming “No! How can it be? Why didn’t somebody tell me!” if I say it’s been hard to get a decent interest rate on cash for the past few years.

Even the Bank of England’s rate rises haven’t done much. High Street banks always drag their feet in passing on rate rises.

But in this article I’ll explain how you can effectively get a 14% return on a chunk of your cash by taking advantage of a bonus offer from RateSetter, the peer-to-peer lender.

True, this very attractive potential return does not come without some risk.

In practice, no Ratesetter investor has yet lost a penny. Every lender has received the rate they expected.

Nevertheless, peer-to-peer does not have the same protections as traditional cash deposits, so you should think about it differently to cash in the bank. More on that below.

If you can accept the risk and have the spare cash to hand, I believe this is a pretty safe – though not guaranteed – way to make a good return.

It also exemplifies how being nimble with your money can enable you to achieve higher returns – even in today’s low rate world.

Not a few Monevator readers have taken advantage of this win-win RateSetter offer over the past couple of years!

About RateSetter

RateSetter is one of the new breed of peer-to-peer lenders aiming to cut out the banks by acting as a matchmaker between ordinary savers and borrowers like you and me.

Rates change all the time, but as I write you can get up to 5.4% as a lender with RateSetter by putting your cash into its five-year market.

Since March 2018 you’ve also been able to open a RateSetter ISA, which means you get your income tax-free.

Meanwhile borrowers can get a loan charging less than 4%. RateSetter claims that rate is competitive with the mainstream banks, and says banks are its competition (rather than it simply getting all the bank rejects).

RateSetter charges no lending fees, which is great news for savers like us. Borrowers do pay a fee.

Over £2.5 billion has now been lent through the RateSetter platform. This is no longer a tiddly operation.

And importantly, of the 66,942 investors who’ve lent money with RateSetter not one has yet lost a penny of their investment.

In 2010 RateSetter set-up a ‘Provision Fund’, which is funded by charging all borrowers a risk-adjusted fee.

Money from the Provision Fund is used to repay lenders whose borrowers miss a payment, for as long as there’s money in the fund to do so.

It’s a different model to the initial approach of rivals like Zopa. Back then you were encouraged to spread your loans widely and accept a few would go bad, reducing your return.

The RateSetter approach is different.

But as sensible people of the world, we should understand there’s no magic here.

Downside protection

Some loans will still go bad. And those bad loans will still reduce the returns enjoyed by lenders in aggregate – because the Provision Fund fee levied against borrowers as part of the cost of their loan could otherwise have gone to lenders through a higher interest rate.

However what the Provision Fund does is share those losses between all lenders, reducing everyone’s return a tad.

This makes your returns predictable. Your outcome should be dependent on the interest you receive – rather than being distorted by the poor luck of being personally hit by an unusually high number of bad debts.

Note that the Provision Fund does not provide complete protection against a situation where all the loans made at RateSetter default. Far from it!

Rather the Provision Fund aims to cover the bad debts predicted by RateSetter’s models, with a margin of safety on top.

At the time of writing, Ratesetter says:

In the event that credit losses were to increase significantly, the following things would happen:

  • The Provision Fund would reduce in value as it reimburses investors for missed payments.

  • The Provision Fund is large enough to cover credit losses up to 116% of expected losses. If credit losses rose above this level, the Provision Fund would be depleted and investors would earn less interest than they expected, but their capital would be unaffected.

  • If credit losses rose even further and exceeded 231% of expected loses, investors would start to lose capital, which means that they would get back less money than they put in.

  • In this instance, it may take longer than expected for investors to receive their money back and access to funds may be restricted.

What would happen if losses did exceed the RateSetter projections?

First the Provision Fund would be used up, and ultimately exhausted.

After that interest payments could be redirected to repaying capital. You’d lose on interest payments, but it could cover lenders’ losses on capital unless the default rate got too high.

Finally, in a doomsday scenario with very high default rates, capital could be eroded. I’d expect other investments like equities and corporate bonds would also be taking a pummeling. But cash in the bank would not.

At the end of the day, I believe for most people the Provision Fund approach is preferable to the lottery of individual loans defaulting. But don’t mistake it for a panacea or a guarantee.

You could conceivably lose money if defaults are much worse than expected. More on that below.

How to bag that 14% return from RateSetter

At last, the good bit!

RateSetter is currently offering a £100 bonus to new customers who invest at least £1,000 in any of its markets and keep it there for a year.

This £1,000 minimum investment can be made up of new subscriptions and/or transfers from other ISA providers.1

The £100 bonus is paid once that year is up. It will be deposited into your RateSetter account, after which you can choose to do with it (and the rest of your money) as you please.

Clicking on any of the RateSetter links in this article will take you directly to the sign-up page for the £100 bonus.

For full disclosure, RateSetter will also pay me a £50 bonus if anyone does sign-up via my links, which would obviously be very welcome! My bonus doesn’t affect your returns. It’s paid by RateSetter.

As for your £1,000 investment, you can put it into any RateSetter market, which range from a rolling one-month option to a five-year lock-up. But you must keep it within RateSetter for a year to get your £100 bonus.

To keep things simple, let’s assume you invest your £1,000 in the one-year market, which matches the period required to qualify for the bonus.

The one-year market is paying 4.7% as I type.

So after one year you’d have your 4.7% interest on your £1,000 and you’d also receive your bonus, which works out as a return of 14.7% on your £1,000.

Very nice!

I’ve ignored taxes here because everyone’s tax situation is different.

The good news on taxes is that:

  • You can now open a RateSetter ISA and collect the bonus. You can fund this with a transfer from another ISA provider. In an ISA the income you earn is tax-free.
  • Most people even outside of an ISA will pay no tax on cash interest, thanks to the new-ish Personal Savings Allowance that covers the first £1,000 of interest earned by basic rate taxpayers, and £500 for higher-rate payers.

Is this bonus too good to be true?

A great question.

Clearly it’s not sustainable for RateSetter to lend your money out at, say, 4%, while paying you an effective rate of nearly 15%.

(The cost is even higher to RateSetter if it pays me a bonus, too.)

RateSetter must be hoping this is the start of a multi-year relationship with its new sign-ups, after they become comfortable with its platform.

Once you get over the initial hurdle, peer-to-peer is straightforward. I’ve used these platforms for ten years now.

RateSetter will hope many customers deposit more than £1,000 and ultimately prove profitable in the long-term.

Like all peer-to-peer lenders, RateSetter will be aiming to scale as quickly as possible. Greater size will improve its margins and enable it to continue to meet demand in both the savings and loans market. Scale is a critical factor in virtually all money-handling businesses.

Finally, I expect the cost of this offer is allocated internally to its marketing department.

If 5,000 people sign-up for the bonus that’s clearly a lot of money – but it wouldn’t buy very much TV airtime. At least this way RateSetter can precisely calculate the return on its investment.

I do think it’s a smart question to ask, though, and it neatly brings us back to risk.

A final word on the risks

I have already stated that peer-to-peer lending is not a straight swap for a cash savings account.

The risks are higher.

Firstly and crucially, there’s no Financial Services Compensation Scheme coverage for peer-to-peer lenders. If you lose money, the authorities will not bail you out like they would for up to £85,000 with a High Street bank savings account.

That’s important because even though no savers have yet lost a penny with RateSetter, that’s not a guarantee they will not do so in the future.

The economic situation could change markedly, say, or RateSetter could get its sums wrong on bad debt.

In the most likely (in my opinion) worst-case scenario, the Provision Fund would not be able to cover all the bad debts. This would mean some loss of interest.

  • According to RateSetter, as of August 2018 the loss rate experienced to date is 2.29%.
  • It currently projects this to rise to 3.33%. (Loans take a while to go bad.)
  • If credit losses rose to 127% of expected losses, RateSetter‘s model indicates the Provision Fund would still cover interest.
  • In what RateSetter terms a severe recession, you’d get no interest but it believes you’d get your initial money back.
  • If we saw 400% expected losses, investors might lose 5.6% of their capital.

This illustration is summarized in the following chart:

Provision Fund figures correct as of 1st August 2018. (Click to enlarge)

Source: RateSetter

As for the worst worst-case scenario, like with any business it is possible to imagine catastrophic situations where you’d lose much more.

But to my mind these would probably require fraud or massive incompetence within the company, and/or a far deeper recession than anything we saw in 2008 and 2009. (Probably both at once – as Warren Buffett says you only see who has been swimming naked when the tide goes out.)

Obviously I don’t think that’s at all likely, otherwise I wouldn’t have put any money into RateSetter.

But a hint of what might have gone wrong came in 2017, when the company intervened to restructure several businesses and cover repayments from one via its own funds. This prevented its bad loans from being defaulted to the Provision Fund. This decision to intervene reportedly2 delayed authorization from the FCA. It has subsequently been granted.

RateSetter says: “This intervention was an exception and will not happen again.”

As I understand it, RateSetter has since withdrawn from the wholesale funding operations that produced this situation. (Wholesale funding is when a company lends money to third parties, who then lend those funds on themselves.)

You invests your own money and takes your choice.

Personally, I am happy with the risk/reward here. Not everyone feels the same. My co-blogger, for instance, doesn’t use any peer-to-peer platforms.

As a halfway house to reduce risk one could perhaps only invest in RateSetter’s monthly market, in the hope this would give you more chance of getting money out relatively quickly if say the economy was coming off the rails. The price is a lower interest rate, of course.

I think it’s worth stressing again that nobody has lost money so far with RateSetter. And even if the economy turns very far south, you probably won’t lose more than a small percentage unless something very bad or criminal happens.

That would be a much worse situation than with cash, but not a catastrophe.

However we all know by now that bad things can happen, and every investment can fail you. Do not invest money you cannot afford to lose.

RateSetter and your portfolio

Personally I have always taken a pick-and-mix approach to spread the risk with these sorts of alternative opportunities.

For instance, I have used both RateSetter and Zopa, I’ve invested a little in mini-bonds and retail bonds, I have money with NS&I, and I have taken advantage of high interest rates and cashback offers with accounts like Santander 1-2-3 to boost my returns.

When putting money into the riskier alternative options, I only invest a low single-digit percentage of my net worth with any particular platform. Like this I aim to mitigate the risks of being hit by some sort of systemic or company failure.

I’m not going to labour the point on risk further. Most peer-to-peer articles barely mention it, and I’ve devoted half this piece to it. Consider yourself warned, and read the company’s extensive material if you want to know more.

I think peer-to-peer and other cash alternatives are interesting additions to our arsenal as private investors. But they’re not slam dunk safe bets. I size my exposure accordingly.

Get your £100 while it lasts

So there you have it – a hopefully even-handed assessment of the risk and reward potential of this £100 bonus offer from RateSetter.

From here you’ll have to make your own mind up.

I do hope some of you found this article interesting and enjoy those bonus-boosted returns.

  1. Note: Terms and conditions apply with transfers, so check the small print. The money must be transferred over within a certain time period, which may be down to the ISA provider you’re transferring from. Just setting up a new RateSetter ISA with a fresh £1,000 should be straightforward. []
  2. See this article at Reuters: https://uk.reuters.com/article/uk-interview-ratesetter/ratesetter-recovering-after-asteroid-strike-bad-loan-discovery-idUKKCN1BN1PF []