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Peer-to-Peer Lending is Better Than Bonds

By Matthew Howard on 31st August, 2022 | Read more by this author

Even over longer periods of time, bonds have barely kept up with rising prices – and perhaps not even that.
Peer-to-peer lending has easily given investors solid real returns over all time periods.

How good are bonds?

On average, bonds are “a bit naff”, according to the fantastic Credit Suisse Global Investment Returns Yearbooks.

OK, the Credit Suisse funded research doesn't actually use those words, but it does show it through its figures and graphs.

The research shows that, in 113 years, shares would have made you over 300 times richer. For corporate bonds, on the other hand, the real rewards haven't even increased wealth by eight times. Far less than that if you include government bonds.

Worse, the Credit Suisse research doesn't consider investing costs. It's not free to buy and sell bonds, because there's some middleman charging you somewhere.

Even worse, when most of us invest in bonds, we do so through bond funds, so that those of us who aren't rich can more easily spread our risks across more bonds. Funds add an extra layer of annual management charges and expense costs, which further reduces average returns.

After costs, the result is that you're not really likely to do much better than savings accounts and you're going to struggle to protect your wealth from rising prices.

Where exactly is the pay-off for bonds?

Astoundingly, you're not even getting great stability in return for these lower rewards. You can invest in bonds on a monthly basis for well over 30 years and still be poorer in real terms at the end. That is not a one-off incident localised in one country, but an event that has happened many times in many places.

And over the short- or even medium-term, you can make some quite significant losses.

It seems to me that the rewards are more volatile than you deserve, considering the meagre potential returns.

Can you be an above average bond investor?

I try to see the positives of bonds, I really do. For example, we're just talking averages here, so some people must do a whole lot better. But, with such a record, it's hard to imagine why anyone would invest in lots of bonds regularly.

I think it makes more sense to save and invest where the odds are already stacked in your favour.

I also like to bear in mind that the excellent researchers who write the Credit Suisse report* have the view that bonds smooth out returns for stock-market investors. But this smoothing comes at a very high price.

And what about peer-to-peer lending?

Many years ago, nearly ten years after peer-to-peer lending started, I first wrote on this very page – now updated – that the vast majority of UK lenders have easily made money.

It's now nearly 20 years since P2P began and the situation is the same: the industry has seen two recessions, one of them the biggest recession in 300 years and the other one was combined with a property market crash. Yet lenders have easily made money over both the short and long term.

I wrote back then that 10 years is not very long and the future is always different to the past. Today, I say that 20 years is also not extremely long compared to other types of investments. But the risk-reward profile of lending to consumers, businesses and against property is well-known. Conservative, low-risk lending practices result in relatively few bumps and yet decent returns.

Why take the risk?

You could go for low-risk bonds and hope that you'll manage to get a real positive return, or even a neutral return (so much for “low risk”). But surely it's better to go for something that's likely to give a real positive return – especially when you take simple steps to manage the risks further to greatly increase your odds?