On 4 June 2019, the Financial Conduct Authority (FCA) released its new regulatory framework for peer-to-peer lending (P2P); a Policy Statement known as PS19/14. As you might imagine, it's a document which, following a three-month consultation, is a hefty read of no fewer than 102 pages.
The stock market and your pension
One of the advantages of pensions is that they can, by design, be very simple from a management point of view. Providers typically have default settings for your portfolio, occupying various real estate along the risk spectrum, and with an automatic gravitation towards a risk-averse slant as you get closer to retirement.
It means that those with little appetite for following markets on a day-to-day basis can build up their pensions with a hands-off approach. However, for those who follow events in the world of finance a bit more closely, there is scope to take control, and to try pre-empt developments within the various markets.
The ups and downs
One of the remarkable features of the past 12 months has been the performance of global markets, and particularly stock market indices. The FTSE All World index broke new ground last month, while the S&P 500 continues to trade in and around record highs. The FTSE 100 has defied the uncertainty of the Brexit vote, and has regularly broken the ceiling of all-time highs in the past year. Even in Europe, the German DAX hit a record high in May.
Such dizzy heights have left many experts convinced that a correction is on its way. The direction of travel cannot always be up, and bear markets come with the territory. Given that many pensions will have some kind of exposure to the performance of these major indices, it may thus be tempting to shuffle the pack, and head for the exit while you’re on a high. These are ultimately subjective decisions, and are best taken after discussions with a financial adviser.
Even still, it should be remembered that trying to speculate on the peaks and troughs of market cycles, and events in the wider economy, is a near-impossible undertaking – even for experts. For example, there was chatter among economists as far back as 2010 that the Bank of England would look to increase base rates. Four years later speculation turned to conviction, as action from Threadneedle Street felt imminent. Yet here we sit in 2017, with only a subsequent cut to new record lows last August to show for it, and no realistic prospect of a sufficient number of hawks on the Monetary Policy Committee ruling the roost anytime soon.
Diversification and peer-to-peer lending
One thing we are major advocates of is investment portfolio diversification, which is the best protection of all when it comes to dealing with market volatility. In the context of equities, this means spreading your investment across a variety of stocks and shares – both in the UK and globally. However, it is also crucial to diversify across various asset classes too, such as property, gilts, bonds and more.
Market volatilities, coupled with shockingly-low rates of savings, have brought into sharp focus the benefits of peer-to-peer lending as a middle ground in terms of risk and return - particularly with the launch of the new ISA. One of the biggest virtues of all is the predictability and stability of returns delivered by prime platforms. While the value of investments such as stocks and shares can go up or down – sometimes dramatically so – those who lend through P2P platforms can expect fixed returns.
Of course, the one similarity with stocks and shares is that capital is at risk, and not covered by the Financial Services Compensation Scheme. However, even in its relatively fledgling 12-year existence, the sector has fast developed a reputation for mitigating these risks. At Lending Works, for example, no lender has ever lost a penny, and all returns due have been delivered to lenders in full, and on time.
Managing your pension
Interestingly, in a recent quote in This is Money, Tom McPhail of Hargreaves Lansdown claimed their institution has found that individuals who take control of their pension pots tend to do better than those who select default funds. The 2015 pension freedoms and the auto-enrolment scheme for workplace pensions will also likely fuel engagement and interest at consumer level, and possibly lead to a more widespread hands-on approach to pension management.
Active involvement in retirement saving should certainly be viewed as a positive development, provided that any portfolio tinkering is done with the combination of an open mind, and substantial research and understanding of what’s involved. For what it’s worth, from our side, we have three simple pieces of advice to offer: diversify, diversify, diversify!
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
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