Peer to Peer Credits – A short Introduction

left: the word "bank" and stick figures interacting through a single node. right: text "peer to peer credits" and stick figures interacting directly
comparison of lending via a bank and peer-to-peer lending

Peer to peer credits are a special kind of loans: You lend money to other people and these people pay back more than you lent them (you get returns).

The principle is the same as in a bank account: You lend money to the bank and the bank offers returns.

The difference is, in peer-to-peer credits you lend money to other people, not to an institution, you are at the same level as the person receiving the money.

If you’re interested in blog posts about investing, you might also like the ones about stocks, ETFs or real estate.

How do Peer to Peer Credits work?

The innovation in peer-to-peer-lending is using the internet to bring creditors and debtors together. There are various platforms for this (see below for three of them).

There are lists of loan requests, where you as an investor can look at the information and data on the loans to pick the ones applicable to your risk profile.

Fortunately there are bots available that pick loans according to your specification. These autoinvest function spare you the time-consuming analysis of available loans.

How does This Investment work?

There are two key features which make this type of investment profitable:

a) exposing your money directly to the risk of losing the whole investment. This increases the interest rates and the possible payoff.
b) diversifying this risk by investing small amounts in many different credits (many small investments)

This combination leads to an attractive gain/risk profile. Another contribution rendering peer to peer credits profitable is the so-called “arbitrage”. The interest rates differ within Europe. Investing in other countries with higher interest rates is at the moment simply more attractive than investing at German interest rates.

What are the chances?

As mentioned before: Interest rates are higher than within other investments where you lend you money to someone else, more than 15% return is possible.

What are the risks?

Each investment comes with a risk. And P2P-investing is often classified as a high risk investment. They’re a young type of investment and there was little time for risks to kick in. There is less experience with this type of investment.

This list of risks is most certainly incomplete:

  • risk of loans not being (fully) paid back: the person who borrowed the money can’t pay it back. This is the obvious risk.
  • risk of platform bankruptcy: When a platform goes bankrupt, it doesn’t handle the credits any more. It’s possible that you don’t get you money back. You probably won’t be able to withdraw your investment for some time.
  • losses not necessarily tax-deductible, while gains are taxed:

Numerical Example: You invest 500 € at 20% interest rate. You receive 100 € in interest. Meanwhile 80€ of loans are not paid back. Therefore, your gain was 20 €. If the interest is taxed (in Germany at 25%) without the possibility to deduct the losses, you would have to pay 25 € in taxes, although you only earned 20 €.

Therefore you’ll not know how profitable your investment was until you get the report on your tax declaration.

Experience

In order to spread the risk of platform bankruptcy, I used different platforms to invest in. The first criterion to choose them was the smallest possible investment in a single loan. If it’s smaller, the diversification increases.

Bondora

Bondora* is an Estonian platform with a very low minimal investment of 5 €. They have lots of statistics and charts available and you can define your risk profile very precisely.

About a year ago (in May 2016 ) I started investing there and return are very promising. They slowed down a little in the past few months.

*The link with an asterisk is a refer-to-a-friend link. If you start investing money after clicking this link, you’ll get your first investment of 5 Euros for free and I get a bonus based on your investment

Mintos

Mintos is a Latvian platform with a minimal investment of 10 €. The user interface is less appealing than the one of bondora, but you can still define your risk profile.

I also started investing about a year ago (in May 2016 ) and the return was eclipsed by bondora, but Mintos kept its pace and it’s about to catch up.

If you want to start investing at mintos, you can use the promo code 5Z4ZUB which is valid until 07/07/2017. Then both of us will get a bonus.

Twino

Twino is a Latvian platform with a minimal investment of 10 €. They wrap up the credits more than the above mentioned platforms and offer them at constant interest rates. Credits with buyback guarantee (= low risk) seem to be on the rise here.

I started investing in January 2017. The availability of credits without a buyback guarantee did not meet my expectations, therefore I’m currently pulling my money out again.

You want to take part in the development of self-tenure? Write a message and let me know what you would like to read in the future:

Initial Thoughts on Real Estate Investing

Real Estate Investments: Buying houses/flats and receive rent

The book Cashflow Quadrant triggered my interest in real estate investments again. A few months ago I already thought about it and requested detailed information about real estate that was for sale. It was easy to see, that this piece of real estate wasn’t a good investment, most of the rent had to be spent on monthly expenses. At first I decided to stay focused on stock and ETFs.

But, as described in the book, real estate has its opportunities, too. The main advantage is that buildings are commonly accepted as a credit security. With this mortgage, you can use other people’s money as a leverage for your earnings – you borrow money, the mortgage improve the conditions (lower interest payments!). Then you buy a house with this borrowed money and receive rent. A fraction of the rent is used for paying back the loan and interest. The remaining part is cashflow and can help you to get a financial cushion.

The key is to find real estate which offers opportunities other potential buyers do not see. Therefore I wanted to check out how this works.

After my experiences with podcasts, I looked for a podcast on real estate investing. The episodes kept mentioning a forum, and in this forum I found a meet-up of real estate investors in a city close by. I went to visit this meet-up. And it was really exciting. Lots of people with real estate experience discussing with each other and lots of opportunities to ask questions.

Apparently there are at least three different ways to invest in real estate:

  • Buying really bad houses, fixing them and sell them
  • Buying houses that are ok, pay back the mortgage over time with a little cashflow remaining. The cashflow increase after you paid back the mortgage
  • Buying houses that are ok, use a part of the rent to pay the interest of the mortgage, keep the mortgage and the other part of the rent as cashflow

So, bottom line: Other people who are discussing and talking about things you want to learn is very helpful. Meeting those guys saved me probably more than one month of reading books and blogs. If discussions at conferences were as vivid as the discussions at this meeting, science would advance much faster! So if you want to learn things like starting a business or investing, meet people who are already doing this in an environment were they are likely to discuss freely and emotionally.

If you think, real estate investing might be an option for you to acquire income which is independent from your research: Check it out for yourself and get some additional information in a forum or a facebook group on real estate investing!

Introduction to ETFs

Development of the MSCI World Index (screenshot taken at https://www.msci.com/world on 02/212017)

ETF? What’s that?

The name is an abbreviation for Exchange Traded Fund. Interpreting literally, an ETF is a fund in which you can invest  in or sell at the stock exchange. This it’s a more liquid version of a fund, because there is an open market where you can trade your shares.

Despite its literal meaning, the term ETF usually refers to funds which try to follow a special stock index, like EuroStoxx-600, NASDAQ-100 or the German DAX.

This sounds more complicated and less transparent than it really is: The most intuitive implementation is the following:

Let’s say, the purely fictional Gummy-Bear-Bank wants to start an ETF mirroring the development of the DAX, that is the development of the 30 biggest German companies. They buy stocks of those 30 companies and offer you shares which will develop similar to the underlying index, because they own those stocks.

No you can invest in more companies with the same amount of money. Thus you can diversify your investment and distribute your risk: If one company screws up and their stock prices crash, there will be other stocks which do not crash.
This diversification comes at a cost, the TER (total expense ratio: yearly costs). The fund management has to keep up with changes of the indexes, document stuff etc., and the cost is the TER. For ETFs, TER is typically lower than 1% per year. You’ll find ETFs on the MSCI World (consisting of more than 1600 stocks) that have a TER of 0.3%. Therefore, the yearly costs of index ETFs are much lower than the costs for actively managed funds. In the first fund management simply replicates the index development while the latter fund management has to find and actively implement its strategy.

Why are they popular?

At the moment interest rates are very low thus it takes longer until compound interest and exponential growth kicks in. Existing alternatives with a guaranteed performance like the German “Riester-Rente” have to adapt their conditions and still raise fees for signing the contract.

Those are the key advantages:

  • low initial cost: only order fees/provisions for buying and selling shares
  • low annual cost: only the TER
  • liquidity/flexibility: you can adapt your investments to your current financial situation
  • meeting stock market performance: a large index ETF will have similar development as the world economy, because lots of companies are part of it.
  • risk diversification: If single stocks crash, you’re not going to notice it in your investment.Sometimes I wonder, if the current praising of ETFs might be exaggerated. I listened to podcast episodes, where ETFs were hyped like a Holy Grail of asset accumulation. ETFs are a cornerstone of my investment strategy, but I think it’s dangerous to focus on a single asset class. There are other asset classes which offer a reasonable performance. Don’t rely on other people’s advice, but invest in your most valuable asset: Your mind.

Additional Information

For more information on exchange traded funds (or financial literacy in general), I’m recommending the following (German) podcasts/blogs:

If you’re looking for information focussing more on other countries or simply in your language, I recommend google. There are probably some bloggers and some podcasters in your country or language, too!

Keep in mind, that I am not a professional when it comes to finances and investments. It’s completely your decision, how to act on the information I am offering here. Therefore it’s your responsibility and I’m not liable for any losses (or gains).

Basic Investment Terms: Bonds and Funds

Text was typset in LaTeX

During the preparation for future blog posts, I hesitated multiple times, because I was referring to terms, which are not clear for everybody.

This means, I have to squeeze in short explanations:

Bonds

A good description of bonds is the following figure of speech: Bonds are the tempered siblings of stocks: They are very common and the concept is easy to understand: If you buy bonds, you borrow money to the bond issuer (a company or a state) for a predefined time  and for predefined interest. This means, you’re able to make plans. The main risk is bankruptcy of the issuer (the company or state), so they might not be able to pay interest and principal.

Some selected government/state issued bonds are considered to be the safest investments which exist. You can park your money there, but you’ll also miss the chance of medium or high returns.

If you want more information, be referred to the wikipedia article.

Funds

A fund, or more precisely investment fund, is basically a way to join other investors, throw your money in a shared pot and investing together. In reality, someone manages the fund’s investments (and gets paid for this job). This enables you to spread the risk over lots of different investments, it allows you to diversify your investments. This diversification comes at a cost: The fund management wants to get paid.

If you look at the further details, you will find different branches of funds:

  • They can be actively managed (increased management cost) or not.
  • They might be exchange traded (you can sell your shares at the stock exchange) or not.
  • They can be open to everybody (you included) or not.

With this term in mind, you’re all set for the next few posts on investment topics.

And now, after reading this  blog post, I hope you will enjoy this legal disclaimer:

Keep in mind, that I am not a professional when it comes to finances and investments. It’s completely your decision, how to act on the information I am offering here.

 

Stocks (in practice)

How to buy stocks

If you want to buy stocks, you need a special bank account for this. At least in Germany every bank I know offers this kind of accounts. The account for shares/stocks comes with an allocations account for money: If you want to buy shares, you have to transfer money on this allocation account and if you sell shares or receive dividends, the bank puts this money into your allocation account.

You can place buying or selling orders using the same channels like transferring money – you can go to the bank personally, sometime you can do it at the phone and you can do this at the online banking interface.

When you start looking for a bank to get an account for your future stocks and shares, here are some things you should keep in mind:

  • at standard direct banks (banks without local physical representations for customer service), you shouldn’t pay a monthly or annual fee simply for the account.
  • order fees below 15 € definitely are possible. For example, if I wanted to sell stocks for 2000 € at XETRA (that’s an electronic stock exchange), I would pay a total fee of 10,90 € (4,95 € + 0.25 % of 2000 €  for my bank and 0,95 € for the stock exchange)

What not to do…

If you want to invest in stocks, there is one big mistake you can make:

Invest your savings and sell your stocks with losses because you panic after the stock prices dropped during a crash and want to limit your losses.

…and how to avoid it

In case you don’t know yet, how you’ll react in such a situation, you should act careful and first gain trust in the fact, that stock prices will go up again after a crash.

I learned this without intention: In August 2007 a friend of mine introduced me to a stock market simulation game that used real stock prices but only playmoney. Back then, I invested 52 000 € of playmoney in different stocks. One year later the financial crisis kicked in and I lost interest in the game when my simulated stock were worth 43 000 € in December 2008. I decided stock are not for me. Anyways, I still received the weekly updates. In 2014 I noticed, that my simulated portfolio was worth 72 000 €. Thus my stocks had an average yield of 4,7% per year even with a big market crash. At that point I realized that stocks can be a worthwhile investment after all.

There is another way to learn to handle dropping stock prices. Simply don’t invest all your money at the beginning. Start your investment strategy with an amount you could handle to lose completely.  And then wait and get to know your reactions to different market situations. If you start feeling more comfortable you can increase the invested amount step by step – it’s better to miss a few market opportunities than panicking while all your savings are at risk.

What’s also helpful to avoid selling in panic is checking the development of your stocks as infrequent as possible and ignoring all news featuring stock markets and economy.

Where do you stand right now? Is there something your would like to see in future posts? Leave me a comment!

Stocks (in Theory)

This is the first blog post on financial investments. I’m starting with stocks because they’re quite mainstream, everybody has heard of this concept and stocks are the basis for a later post on ETFs.

Before the real content of this blog post starts, please enjoy this legal disclaimer:

Keep in mind, that I am not a professional when it comes to finances and investments. It’s completely your decision, how to act on the information I am offering here. In case you want to blame someone when it’s not working out for you – start with yourself. Everything else is ridiculous 😉

This post got longer than initially intended, so I’m dividing it into two smaller ones. This one focuses on the basic ideas behind stocks with the subtopics

  • Stocks? What are Stocks?
  • Strategies

The following second part is „Stock in Practice“ with the following subtopics:

  • How to buy stocks
  • What not to do and how to avoid it

Stocks? What are Stocks?

Stocks are little parts of a company or enterprise. For example in January 2017, there were 850 million Siemens stocks (850.000.000) out there. So if you own one of those, you own 850,000,000th of Siemens. Therefore you can claim the same share of the money this corporation earns.

There are two main reasons that define the characteristics of stocks. Other people who own the remaining stocks and the possibility to reinvest the current earnings in the company to increase the expected earnings

in the future. While some stockholders want to keep their stocks for a long time and are more interested in increased future earnings, other stockholders are interested in what’s happening on the short-term. They all can cast their vote at the stockholder’s meeting and decide how much of the earnings is reinvested and how much is distributed as a dividend to the stockholders. This is the money you might get.

If you think, you can get higher returns on your investments somewhere else, you can sell your shares. And if lots of other people assume the same, the stock price will decrease, until it finds a new equilibrium where the expected return on  investment for this stock is equal to the expected return on other investments. On the opposite, if lots of people have positive expectations, they are willing to pay more money for each stock, until a new equilibrium is reached.

In real life, those price adaptions create the volatility of stock prices: There is lots of information out there influencing the predictions of  investors. You can recognize this in the following figure.

Development of the MSCI World stock market index (screenshot taken at https://www.msci.com/world on 02/21/2017). There are small ups and downs an there is also a long-term upwards trend.

Strategies

Technically, the price development of stocks can be divided into short-term and long-term development. Again, be refered to the figure The short-term dynamics are more or less noise while the longterm developments originate from a combination of reinvesting of earnings and distribution of those earning as dividends.

Based on those different contributions to stock price development, it’s possible to classify the strategies, based on which effect they rely on.

If you’re relying on changing course, buying the stocks at low prices and selling at high prices, then you’re using a trading strategy. With this strategy it’s either lots of effort in analyzing the stocks or simply gambling. Your gains are someone else’s losses, because no value is created.

And if you take the trading fees and commissions into account, that are paid to your bank and the stock exchange, than you and the person on the other end of the transaction end up with less money. Especially if you’re competing with professionals like investment bankers (while you’re using most of your time doing actual research), then you have to decide for yourself if this is going to be your strategy 😉

Personally I’m using the buy-and-hold strategy. I’m buying the stocks, wait and do nothing for the first couple of years. By doing that, I’m avoiding giving too much money way as trading commissions. Also I don’t have to perform analyses all the time, and the time you want to invest in analysis is up to you. At the beginning, I looked for stocks of big, well-known companies (also called blue chip values) and tried to diversify over different countries and different sectors. So the analysis was more based on common knowledge than on facts. And because I only chose stocks of companies I already had heard of, I ended up with a big home bias, with lots of German and European stocks.

Further Information

As mentioned in the beginning, there will be an article on stocks in practice next week. While writing this post I also noticed that I probably have to write an article on investment risks and risk management.

If you want to learn more about stocks, I’m recommending finding a podcast on financial education, financial literacy, investments or something like this and listening to I during sports, car drives or doing the chores. Podcast in the German language I’m recommending are Finanzrocker, “der Finanzwesir rockt” and zendepot.