The stock market: an incomparable start
Spreading investments to reduce risks is essential. The last one and a half years I have been diversifying my investment portfolio using multiple P2P lending platforms. I also invest in start-up companies via the crowdfunding platform Seedrs. But I felt this was not enough diversification, and I have been thinking about investing via the stock market for a while now. But the market was doing great for several years now, and I knew this couldn’t last. So I decided to wait until the big drop.
And at the beginning of this month the stock market made a huge fall, a 15% drop in less than 2 weeks. Of course we all know why. At first, in January, it wasn’t that serious. Officials told the public that the risks were quite low, and the virus was not expected to spread in the country (in my case: The Netherlands). And even as late as the end of February we were told we had nothing to worry about.
Then, after the first reported cases the stock market took a dive and dropped 15% in a few days. I then read that investors agreed that the stock prices were lowered more than enough to accomodate for the Corona virus effects on the economy, and that some shares were even thought to be affected too much. After that, the market recovered a bit. That moment seemed like a good time to enter the stock market. I assumed that after a huge drop, there was a good chance to realise a good return rate in the long run, and possibly even in a short period.
The chart above shows the big drop in the market, and I have marked the point where I stepped in and bought shares in a tracker fund that follows the economy (to be exact : a MSCI World ETF).
What happened then?
And now we all know what happened further, and how “all hell broke loose”. Right after the moment I stepped in the first confirmed Corona related deaths were reported in my country. After that, things went south everywhere.
Just a week later the stock market plunged another 15-20%. You can imagined how I felt then about the moment I chose to enter the market. Well to be honest, with all the news coming in from Italy, Spain, and to a lesser extend the south of my own country, I felt two things at the same time: a bit of disappointment, but also a larger feeling of relief that my environment and myself were still unaffected by Corona.
To put the drop in perspective, here is a chart of the Amsterdam AEX index. The trend of this index is similar to the MSCI World index, and the chart shows the last 12 months:
When you look closely you can see the small peak all the way to the right, halfway at the drop-off, where I entered the market (at the ‘550’ line).
So how do I feel now?
So it is a bit of a bummer, waiting just a few days longer would have saved me around 500 euros. But that is all in hindsight of course. If the stock market would be so predictable that these things could have been foreseen, then everybody would be rich. Or more likely, all trading would have stopped.
Basically it is impossible to predict the exact right time to buy or sell on the stock market. So the best you can do is just start investing, and to keep a focus on the long term. Eventually the stock market will recover and reach new records again. But that may take quite a while.
So I am glad I made the move, now it is just a matter of making the most of it. I never expected the road to financial independence to be a smooth one. But it is clear that this is a very different way to invest, compared to P2P lending.
What are the differences?
The biggest difference is clear now I think: the (lack of) predictability. The stock market can go in all directions, where investing via P2P lending gives a rather stable stream of income. That lack of predictability is also visible in the return rates. Crowdlending offers a stable 8-12% interest income, depending on the choices you make and the risks you are willing to take, and you can expect the interest income be be fairly stable from month to month. When you look at the stock market, is it impossible to make predictions.
This makes the stock market suitable for long term investments. There are no guarantees, but it should be possible to make a nice return over a 10-20 year period. P2P lending platforms also allow for short term investments. You can choose to invest in loans with a loan term of just a few weeks or months, or choose to invest in loans with a loan term of several years.
Another difference is the auto-invest functionality offered by the P2P lending platforms. You can have your money invested for you on the stock market, but that will come with a significant management fee. P2P platforms allow you to set the parameters for automated investing and from that moment on you do not have to give it a second look. You can setup automatic periodical deposits from your bank account and that will be automatically invested for you too. You can setup deposits to your stock market investment account, but you will still have to invest that manually. It is not a lot of work if you have decided to invest in just a single index fund, but otherwise it requires quite a bit of research.
And finally, you need to be able to cope with significant fluctuations in the value of your portfolio. The prices of the stocks and index funds you have invested in can change from day to day, even from minute to minute. I have seen the value of my 10k portfolio increasing by 200 euros in a single day, and the very next day the value decreased by a whopping 300 euros. This does not happen with P2P lending portfolios, here you will see just a steadily increase in the total value of your accounts.
Securing your portfolio
With all the risks and uncertainties it is important to secure your portfolio, to protect your funds as much as possible. Of course this is still investing, so there will always be a certain level is risk involved. If you want to avoid all risks you should put your money in a savings account. But we all know your money will wither away there, it does not generate interest and it will be consumed by taxes and inflation.
You can reduce the risks when investing via P2P lending platforms by choosing platforms that have a proven track record. We all know now that new platforms that promise high returns are too big a risk. Platforms that have a proven track record include TWINO and Mintos, two platforms that together hold over 50% of the European P2P lending market. Mintos is the biggest platform, with dozens of connected loan orginators. TWINO is twice as old, established in 2009, so it is old enough to have experienced and be prepared for a recession. Bondora Go&Grow offers maybe half the interest rate (up to 6.75%) but you can withdraw all your funds at any time, which is also a way to decrease risks.
Investing via the stock market is mainly something for the long term. You can make big profits within a few days, but you can also loose a lot of money. I lost 10% in just a few days, but I expect these losses will be compensated in the future. It also makes a difference what you are investing in. Investing in stocks of a single company can be rewarding, but also very risky. Who knows whether that company is still worth something after 5-10 years!
That is the reason I have invested mostly in ETF’s (Exchange Traded Funds). The value of these funds follow a certain index (such as the S&P500, AEX, or other stock exchange indexes, or a world index) or the value of a commodity (such as gold, oil, grain, etc.).
Such a stock market index or commodity also has its ups and downs, but you don’t have to worry about it disappearing or withering away. Stock market indexes are regularly updated, and lesser performing or traded stocks are replaced with other stock shares. An ETF that follows such an index just follows the performance of the index by holding the same stocks as the index. This averages out a sudden drop of a single stock, but of course it also flattens possible value increases. But research has shown that investing in index funds outperforms manual investments in the long run.
So what is the best way to invest?
I think the short answer is: both. Diversification is really important, and investing all your money in just one market is really risky. Of course people that are more adventurous can decide to invest more via the stock market, and people that seek a more steady revenue stream could decide to invest more via P2P lending.
Important to note is that all markets allow you to invest with higher risks (and possibly higher returns) and to invest more conservatively. Even when you decide to take more risks it is wise to invest a part of your portfolio in a more conservative way. Investing is a long term activity, you should never go for short term profits only.
It is wise to so some research before entering a new market. We’re investing our own hard earned money after all. From now on I will add my stock portfolios to my monthly updates, so you can compare it to P2P lending performance. Of course milage may vary, if you decide to start investing too then you could see a better performance, or worse.
I did some research too before entering the stock market, but that did not prevent the short term loss. There are always things that are unforeseen, and it is easy to be tempted by possible short term profits. So it is advisable to always start conservatively. You’ll probably feel better choosing safe and steady over a profitable rollercoaster ride.