Riblet#5: How much risk are you taking?

You take risk to get reward, and if you are dissatisfied with the reward you are getting, then you might decide to take more risk. You might decide to do something to increase your company’s profit, or to earn more money from a job or from an investment. But you have to understand the nature of the risk you are taking.

Ten years ago, interest rates plummeted and have not recovered since. This has frustrated savers and led many to seek better returns, such as peer-to-peer lending where savers lend to individual borrowers via an internet platform. Around £6 billion will have been lent this way in the UK this year.

When you save with a bank or building society, your money is protected up to a certain limit (up to £85,000 when it is with a UK regulated institution); that is not the case with peer-to-peer lending. And you cannot just get your money out whenever you want.

Peer-to-peer lenders give a return of 5%-6% versus rarely more than 1% with a large financial institution, but you have to understand the risk. If the platform goes bust then you will probably not get your money back; and these platforms don’t disclose who they are lending to nor what their criteria are. In October, FundingSecure collapsed putting £80m of savers’ money at risk. It had been offering rates of 16%. Another platform, Lendy, went bust in May with £160m worth of loans outstanding.

One strategy is to test any potential risk strategy on a small scale until you are confident you understand it, and even then, the 300 year-old advice from Don Quixote still applies: do not put all your eggs in any one risky basket…

Data Source: The Guardian Money, Don Quijote – Miguel de Cervantes

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