The most important information for any investor is their rate of ROI (return on investment). Regardless of where you place your money, you want to know that it’s working for you. While all investment companies will provide an estimate based on projections of expected performance before you place your money with them, an estimate is not a definitive answer. The same can be said for P2P (peer to peer) investors. What you want to know at the end of each month – or day, or year, depending on your degree of curiosity – is what your actual net return – the value of your assets minus the value of their liabilities – is. Why? Because it is your net return that will let you know if your money is in the right place, and if P2P is working for you.
In this article we’re going to be looking at the best ways to measure your P2P investment’s performance, how to calculate your net return, the factors that will influence this, and what you can expect from the FastInvest model.
P2P Investments: An Overview
A product of the digital age and the global financial crisis, P2P lending investments emerged when would-be borrowers without security suddenly found that banks could no longer help them. Unable to acquire the funding they needed – either for personal or business means – through established banking methods, people began turning elsewhere. P2P essentially sees people who have money loaning it to people who need it, for a mutually-agreeable interest rate:
- The borrower gains access to funds quickly and efficiently, without having to navigate the red tape associated with traditional financial institutions – as long as their credit rating is up to scratch.
- The lender is able to generate a return far higher than if they trusted their money to a bank – the FastInvest interest rate, for example, is typically 9-13%, vs the sub-2% offered by most banks.
Generally short-term – one to twelve months – and for comparatively low sums, P2P lending presents a low-risk form of investment suitable for savers of any amount. It’s possible to begin your portfolio with as little as €1 – that’s the FastInvest starting point – but it won’t take long to grow your investment from there.
FastInvest began operating a P2P platform in 2015, and has so far worked with more than 8,500 happy investors. Offering default and buy-back guarantees, FastInvest’s proposition is safer than most; if a borrower defaults on a loan repayment, FastInvest covers the deficit, meaning that investor’s money is always safe. In return, once started, the vast majority of investors remain loyal to the brand, keeping their money working passively, using the FastInvest Auto Invest tool – a system which uses algorithms to automatically re-invest profits according to the user's pre-configured preferences. It means that that original Euro endlessly multiplies without any effort on the investor's part.
With offices throughout Europe – and an American office in the pipeline – FastInvest work with a wide demographic, from the first-time dabbler, to the serious investor. The company’s aim is to democratise investment; making it open and accessible to all. It’s because of this that all clients are treated equally, and the performance of every investment is monitored and matters. But while we keep track of every transaction, you also need to know how to keep track of yours.
How to Measure Performance on Your Investments
Measuring the performance of your investments is a two-step process, and the same rules apply whether you’re dealing in loans, bonds, shares, or even property:
- Firstly, you’ll need to work out the return that each investment generates. To do this you’ll need to carry out a simple equation: The current value, minus the original value (or the value at the start of the time you’re reviewing) and minus any fees. Divide this figure by the original value, then multiply that by 100%. That will give you your basic rate of return, but for the true rate, you’ll also need to deduct the rate of inflation for the investment period – so at the moment in the UK that’s 2.8%. If your investment hasn’t made any gains after inflation has been deducted, it’s safe to assume that you’re not making a good enough return to justify the investment, and it might be worth looking into putting your money elsewhere.
- Assuming that you have reached a figure above 0 after taking inflation into account, the next step is to make some comparisons. Do the same sum again to see if your cash would have generated a greater return if left in a current account, and again in a savings account. Again, if your first figure isn’t higher than through traditional banking methods, it could be time to rethink your strategy – after all, investing does come with some risk, and there’s no point in taking risks if they don’t bring any gains.
You now have your net return, and this is important because it allows you to make an informed decision about the future of your investments. Are they in the right place? Could they generate a greater income for you if you moved them elsewhere? Is the ROI great enough to justify the risks? Could you gain a similar return with a lower-risk investment platform?
Wherever you place your money, your final return will be impacted upon by numerous extraneous variables, from the state of the overall economy, to platform-specific risks. In the case of P2P, for example, the charges that the platform levies. It always makes sense to check this before placing your money anywhere as such charges can significantly impact on your net return – an 11% interest rate may look very attractive, but it boils down to very little indeed if the platform is charging a 10% fee. Unless you’re working with FastInvest, where defaulted payments are covered by the company, borrowers defaulting on their payments is another uncontrollable variable which can impact on your net profit, while at the other end of the scale, another influencing factor could be borrowers clearing their debt early, and thus limiting the amount of potential interest gained. All of these things can impact on the money you actually take home at the end of an investment, which is why it’s important to look at your final net figure when assessing the value of your investments. That being said, it’s also important to maintain a sense of pragmatism.
While every investment is entered into with a spirit of optimism – why else would you do it if you didn’t think that it would help to bring healthy returns your way? – it is still important to keep a sense of realism. So, although you’re making an investment to make money, don’t expect to become a multi-billionaire, or even single-millionaire, over night. All forms of investment come with fluctuations of fortune, and P2P isn’t an exception. But while daily, or weekly returns may flutter around like a moth against a window, it’s the longer term that you need to keep in mind. If you select the right platform to work with, and the right opportunities within that platform, you are almost guaranteed a greater return than if you left your cash lingering in a bank – even with the UK interest rate increasing to 1.5%, your money would have to sit still for a very long time to come close to generating the return offered by P2P investment.
If you need reassuring, 18 months is generally the golden time, where you can fully see what your investment has been doing while you’ve been off living your life. It’s then that you’ll be able to sit back and bask in the glow of a sensible choice, well-made – and a healthy ROI.
A lot of people are put off investing their savings, not just because of the potential risk that an investment represents, but because they think that it’s far too complicated. There’s the actual process of finding somewhere to put your money. There’s weighing up the different interest rates, and the return-risk ratio. And after all that, there’s the difficulty in understanding just exactly what your money has been doing for you – whether it would have been better off stashed under your mattress after all. THAT is where knowing your net return comes in. If you know that your money is working; if you can see that for every £100 you placed, you now have an extra fiver or tenner to your name; if you know that that fiver will keep on growing with each successive investment, then it has to be worth the effort.
Whether you’re working with £100, or £100,000, the principle remains the same: your money can only make money if you put it to work. Keeping track of your net return simply allows you to establish whether your cash has found a career as a minimum wage drone, or is hitting the big-time as a high-flying business mogul. It's the difference between risk and calculated risk. And only a fool would opt for the former.