Peer-to-peer loans (e.g. LendingClub). I wouldn’t suggest starting with this unless you’re already investing in the usual instruments. These are a more exotic investment for extra diversification. These have a high risk of default (don’t bet the farm), but also high interest. You get to be the credit card company.
Having uncorrelated return streams in your portfolio drastically lowers the volatility of your portfolio.
Even if it’s a worse investment than the stock market on its own, adding it to your portfolio can make the overall portfolio better, if sized appropriately to its volatility. That’s why I said not to start with this unless you’re already investing in the usual instruments.
Is it actually uncorrelated? Seems like default would be significantly more likely at the same times that a stock market crash would be, because that’s when ppl lose their jobs. Can you do P2P loans to ppl in other countries? That would reduce correlation somewhat.
Are the kind of people who take out P2P loans the same kind of people who have a lot of excess money to invest in the stock market? How correlated would they be?
That depends. If you’re investing in small businesses, maybe a lot. People borrow money for various reasons, and have different risk profiles, and as the investor, you can pick and choose.
For example, a recent college graduate who just landed a high-paying job may get a P2P loan to consolidate credit card debt. How correlated do you expect that to be to the stock market?
Individuals are still affected by the broader economy (the guy could lose his job because of this), but we don’t need 0% correlation to benefit a portfolio, and you can cut off the extreme tail in the stock market using cheap index puts. The only way to answer this is with data.
Peer-to-peer loans (e.g. LendingClub). I wouldn’t suggest starting with this unless you’re already investing in the usual instruments. These are a more exotic investment for extra diversification. These have a high risk of default (don’t bet the farm), but also high interest. You get to be the credit card company.
The returns I’ve seen from ppl who’ve done this were in line with the stock market so on a risk-adjusted basis it seems like a bad idea.
It’s not about the absolute returns, but their correlation to your other investments.
Even if it’s a worse investment than the stock market on its own, adding it to your portfolio can make the overall portfolio better, if sized appropriately to its volatility. That’s why I said not to start with this unless you’re already investing in the usual instruments.
Is it actually uncorrelated? Seems like default would be significantly more likely at the same times that a stock market crash would be, because that’s when ppl lose their jobs. Can you do P2P loans to ppl in other countries? That would reduce correlation somewhat.
Are the kind of people who take out P2P loans the same kind of people who have a lot of excess money to invest in the stock market? How correlated would they be?
That depends. If you’re investing in small businesses, maybe a lot. People borrow money for various reasons, and have different risk profiles, and as the investor, you can pick and choose.
For example, a recent college graduate who just landed a high-paying job may get a P2P loan to consolidate credit card debt. How correlated do you expect that to be to the stock market?
Individuals are still affected by the broader economy (the guy could lose his job because of this), but we don’t need 0% correlation to benefit a portfolio, and you can cut off the extreme tail in the stock market using cheap index puts. The only way to answer this is with data.