Every week I read a large number of personal finance and investing articles. Here’s my latest weekly shortcut to the best.
Very few private investors give much thought to asset allocation, even though it’s far more important than picking stocks or funds in determining your investment returns.
Even worse, those who do set up a nicely diversified portfolio often forget all about their ideal asset mix once they’ve made their initial decisions!
This is foolish, and potentially bad for your wealth, since like this you’re leaving asset allocation to the whims of the market.
Often the only time people wonder whether they should have rebalanced is when a big bear market slices more money off their net wealth in six months than they’d ever imagined possible.
If you’ve diversified your portfolio into different assets to reduce its volatility and improve its risk/return characteristics, it makes no sense to abandon that just because one asset class has boomed and another slumped.
Instead, periodically rebalancing your portfolio by selling down winning assets to buy more of under-performing assets can boost your returns, help keep volatility closer to your own tolerance levels, and reduce the risk of your portfolio being exposed to bubble markets.
Alas it seems Zopa, the UK peer-to-peer lender, isn’t immune to the downturn – at least not if my recent experience is anything to go by.
Readers may recall I was worried that bad debts would rise at Zopa as far back as March 2008.
My fear was that consumers starved of finance by the credit crunch would get loans at Zopa (which claims to have more rigorous credit checks than the banks) before eventually succumbing to their debts.
Rising interest rates were obviously attractive to Zopa lenders, but did it suggest consumers were more desperate?
This is important because with Zopa, unlike a bank saving account, you can lose your money if your borrowers default.
Do not mistake Zopa for a savings account! Read my earlier article for more on the pros and cons of Zopa.
It seemed like my fears were misplaced as recently as January, when bad debt was still below Zopa’s projections. I’d not seen any bad debts!
But in the past few weeks two of my late payers have officially been written off as bad debts. That’s out of the 100 minimum-sized loans I’ve originated, and it represents 17% of my earnings to date from lending, though less than 2% of my initial Zopa ‘pot’.
This series has previously looked at the general principle of investing during a crisis, as well as how you might react to particular headline news events.
But crisis investing is also relevant to particular company stocks.