The risks of peer to peer lending are multiple. To invest well, you have to know all risks of peer to peer lending and diversify your asset allocation. A difficulty in diversification is the lack of knowledge of the risks specific to the types of assets in which we invest. Here is a list of the most comprehensive possible risks related to loans between individuals (crowdlending, crowdfunding).
In general, all investments are subject to a risk or a combination of different risks. The risk is a deviation from the expected result of the investment, which may result in non-achievement of investment objectives. Before making an investment, any investor should be careful and try to understand the risks associated with the investment, as well as their probability of arriving, which is an important element for measuring the expected results.
Opposed to traditional bank deposits, investing activities can have both positive and negative effects. In addition, the preservation of investment capital is also not guaranteed. The total value of the investment, including capital and returns, is never guaranteed and may change significantly over time or due to certain circumstances. The historical performance of certain investments or asset classes can not guarantee a similar performance in future periods.
Each investor should understand that all risks, related to the investment, as well as any losses, are the sole responsibility of the investor. Therefore, it is very important to analyze and understand whether a combination of risks, related to certain investments, is acceptable. Many factors can affect the measurement of risk and there are portfolio management tools to measure and mitigate risk factors. The risk assessment can be carried out independently by the investor or with the help of professional investment advisers.
Market risk, also known as systematic risk, is the risk that adverse market events, such as macroeconomic factors (interest rates, inflation, recession, currencies, etc.), social or political instability in the market, affect the value of the investment. unforeseen actions of other investors or other external events. These events often result in asset price changes and increased volatility. Typically, using a long-term investment horizon with active asset allocation strategies can partially mitigate market risk exposure.
Liquidity risk refers to a situation in which, at the time of the sale of the investment, demand in the market is insufficient. Some types of assets are almost always liquid. However, other investments may be faced with a situation where, at the time of the liquidation of the investment, there is no buyer on the market or where the price level is lower than expected. Periods of illiquidity can result in a prolonged outflow of the investment.
Another aspect of liquidity risk is that, when the exit of the investment can not be prolonged and the investor is forced to liquidate it at a given moment, this may result in a decrease in expected returns and even a partial loss. of the principal of the investment. In addition, additional fees, such as increased sales commissions, additional advertising, valuation of investments, etc. can also be generated because of the liquidity risk.
Higher prices reduce the purchasing power of your investment, but if the inflation rate is higher than the real rate of return, direct losses may result.
Risk of change
Buying an asset in another country or currency may result in currency risk, when the investor may experience adverse movements in foreign exchange rates.
Political risk is another risk related to the local environment, as the value of the investment can fall significantly in the event of political instability, civil unrest and other similar actions.
Regulatory or legal risks arise from the fact that local governments and other regulators have a significant impact on the economic environment of investment activities. A stable social and economic environment can positively affect the value of the investment and vice versa. When the government often changes its legislation, for example by imposing an additional income tax on individuals or introducing new taxes in the real estate sector, the investment climate in the region is deteriorating and may lead to lower yields. real investment.
When interest rates rise in the economy, the prices of many assets decline and vice versa. Interest rates also have a significant impact on overall economic activity and borrowing costs.
The specific or concentration risk is the risk, which is correlated to the global market; This non-systematic risk is specific to certain assets, sectors or places. The good news is that this type of risk can be almost completely eliminated by diversifying investments.
Risks of the project
All investment opportunities, which are offered to investors on websites, go through a detailed and impartial due diligence process. The teams at these sites study professionally projects in financial, legal, technical, marketing and other areas.
Operational risks are directly related to the activities of companies like
Envestio for example, when, for certain reasons, the unlikely case of liquidation of the company would take place.
Minimize and mitigate investment risks
Once investors understand and understand different types of risks related to their investments, they can use different portfolio management strategies to avoid or mitigate them. It is always advisable to conduct this process independently or with the help of professional investment advisors.
Although inter-company loan companies, such as Envestio for example, make all reasonable efforts to obtain reliable information on investment risks from different sources, there is no guarantee as to accuracy, reliability or the completeness of the third party information presented. This information should not be treated as professional investment advice. It is always strongly suggested to consult professional investment advisors before making any investment decisions.
I am Erwann. In my thirty, dad of two beautiful children, happy husband and engineer with a full time job. All this leaves me little free time. I optimize every minute of this free time to train for investment.
My discovery of the FIRE movement opened me to the world of investment. Good financial management is the first step towards financial independence. I invite you to follow me in this adventure.