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Stock market volatility – how do P2P investments compare?

Economic turmoil in China finally spread to the rest of the world this week, with falls in the country’s stock market leading to panic on exchanges in Japan, Europe, America and elsewhere.

The Great Fall of China?

Share prices in general have been volatile over recent months, due partly to the ongoing debt crisis in Greece as well as fears over growth prospects in the Far East.

But the Chinese government’s recent attempts to shore up the country’s currency and equity values spooked global investors, leading to losses not seen since the darkest days of the financial crisis in 2008.

In the UK, the FTSE-100 lost around £74 billion in value on “Black Monday” before recovering later in the week.

The impact of stock market volatility

Volatility is part and parcel of investing in the markets, but the question this week’s events raises for many individuals is whether they are happy to face these kinds of ups and downs on a semi-regular basis.

Recent changes in pension rules make this an even more important issue for thousands of people who have either just reached retirement age or are just about to. The legislation introduced last April means it is much easier to keep pension savings invested in stocks and shares, often with money drawn out every month to cover living expenses. But for people who are relying on their investments to generate a steady flow of cash, sudden falls such as those we have seen this week can be extremely damaging.

Alternative options for pensioners

A risk-free alternative is an annuity – but it was the poor returns on annuities, allied to their inflexibility, which led to the government’s decision to relax pension rules. Cash saving accounts have little more to offer at the moment with interest rates stuck near all-time lows.

So it comes as little surprise that forms of alternative finance such as peer-to-peer lending are becoming increasingly popular. P2P loans do carry more risk than annuities or deposit accounts. But the returns are correspondingly higher – and over recent years volatility has been kept to a minimum on the leading platforms.

Balancing risk and return

Figures published recently by analyst Liberum show how stable returns on P2P lending have been: for example, the firm’s research shows that the net yield provided by Zopa has averaged 7% since 2005, and remained above 4.5% even during the financial crisis.

Zopa also publishes data on the non-repayment performance of borrowers – this is the key risk that borrowers face. Over the past five years the actual levels of defaults have been significantly under the expected default rates.

Peer-to-peer – a less volatile option

This does not mean that returns on P2P loans are guaranteed or that lenders’ capital is not at risk. But it is clear that, up until this point, P2P lenders haven’t endured anything like the volatility that stock market investors have to deal with.

At the moment, no one knows how the current situations in China and Greece are going to play out. But for investors these are anxious times, and it is well worth considering a less nerve-jangling home for your cash.