Lessons From An Investment That Took A Wrong Turn

No matter how thorough or well-researched, there will be investments that take a wrong turn. Win some, lose some, that’s the game of investing. The trick, of course, is to make bigger and more wins than losses to achieve a net gain. No point crying over spilt milk, the best I can do is to take the lesson and learn to become a better investor as I go along. 

Losses are painful bear, that’s why sometimes not losing is a win in itself. The bigger the loss, the more it takes to recover. The math bears out clearly:

• A 20% loss means a 25% gain to recover original position
• A 50% loss requires a whopping 100% gain to return to neutral…almost insurmountable

Here’s a recent incident of an investment mishap that serves as a reminder that investing carries risks. 

Peer-2-Peer Lending (P2P)

In 2017, I was introduced to P2P lending (a.k.a crowdfunding) at an investment fair. Catering to small-medium enterprises (SMEs) with need for operational funding on the one hand and investors seeking higher yield on the other, their propositions and offerings fill a gap left by traditional lenders.

After some research, I started investing and enjoyed monthly interest earnings between 7%-13% for loan durations ranging from 3 to 12 months. With fixed deposits hovering at 1%, these were  good returns. Its mobile App offers top-ups, withdrawals and auto-invest feature, making transacting and managing my account seamless and easy, regardless of the time zone I was in. 

Then Came Covid

Everything was hunky-dory…until Covid hit. Borrowers struggled with interest payments and several had trouble repaying the principal upon maturity. As part of Covid-exception, loan tenures were extended by the watchdog authority. 

Since January 2023, there has been no interest payment. Early this month, I received an email that the platform will cease operation. Depending on the size and conditions of the loans, some would be written off while legal recourse would be sought for the rest. 

The prognosis is not good as I will likely lose most, if not all, of the outstanding stale loans. My only comfort is that the interest earned to-date is slightly more than my capital exposure. So in a way, I broke even. But still, it stinks. 

Lessons Learnt

Losses are hard to swallow especially in retirement because they poke holes in a painstakingly constructed safety net. Like a leaky bucket. So what are the lessons learnt from this mis-adventure?

Set fitting investment goals

Being eager to learn and try new experiences, my goals when I stepped into P2P lending were to build another retirement income stream and earn higher yield.

I now realised these 2 goals were too long-term and open-ended. I should have aimed for something concrete and short-term like funding my next trip to Asia. The newer the endeavour, the smaller the goal, as it should be to keep things in perspective. Start with small goals and expand as track record and experience build up. The big hairy audacious goals like saving for downpayment of your forever house  are for tried-and-tested asset classes and proven strategies.

Plough-back strategy

While we all know the wisdom of exit strategy, I will now add a plough-back strategy too. This helps to take profit off the table at shorter interval before reaching exit point, especially important if the investment goals are long-term. Capital plough-back double protects profit before it dissipates, further limiting downside exposure. 

That was how my S.O and I managed our forays into cryptocurrencies. We set to exit once we made enough to remodel our bathroom. What we did brilliantly was to keep ploughing back capital whenever gains reached 5-10% of the invested amount, as a guard against market volatility. When the market dived at the end of 2021, we had fully recouped our capital plus a new bathroom. What we lost were other people’s money. Trust me, it’s less painful.

While I had an exit plan, I underestimated the illiquidity of the lock-in period. 12 months is a long time when a black swan event like Covid hit, with its everything-everywhere all-at-once effect. With hindsight, I will only invest after capital is returned instead of assuming they would be returned. I was fooled by the ‘short-term’ nature of the loans.

Capital plough-back denies the market the opportunity to usurp your gains before you reach the exit point or goal.

Technology (Dis)advantage

At its height, loans were being snapped up within minutes of launch on the P2P lending platform. The auto-invest feature in the App helped me participated in deals despite being 6-7 hours behind. All I had to do was to specify the industry, interest rate range and investment amount. The auto-invest feature took care of the rest.

However, this reliance on technology resulted in multiple deals from the same borrowers as some loans were made in tranches. While the auto-invest feature helped me snatched deals, it also breached my asset allocation and diversification rules. It resulted in un-intended higher exposure to some borrowers and investing more than planned due to the ease and sheer number of deals. 

It is the interplay between these 2 essential portfolio management strategies that is crucial to limit risks. Asset allocation first then diversification, and in this order to make a portfolio more robust against the destruction of market forces and our own emotions. 

Moving forward, I will stay sharp and be aware of how Apps can overrun my investment criteria. Ease and speed sometimes work to your disadvantage too. Using technology, therefore,In  warrants more frequent reviews in keeping with the speed afforded by technology. 

Dealing With Losses

Will I invest in P2P lending or crowdfunding again? Yes. Losing doesn’t mean it’s a bad asset class. I just need a sharper game plan and do more frequent portfolio checks.

This mis-adventure won’t stop me from investing in P2P lending nor try out other new investments. What I’ve learned from these experiences can only help me grow as an investor. I  now consider myself having ‘graduated’ from novice to intermediate level as a P2P lending investor 🙂 

In fact, I’m contemplating investing in a real-estate crowd-funding venture offering 10-13% returns, fully collateralised by the underlying properties. Liquidity comes in the form of platform tokens representing shares in the properties, which can be traded amongst new and existing investors. Sounds better than the P2P lending platform, and this time, I am better armoured going into this the battlefield.

Learn, apply, repeat. 

Savvy Maverick

(Main image: Lubomirkin, Unsplash)

Disclaimer: The views expressed here are drawn from personal experiences and do not constitute financial advice in any way. Nothing published here nor should any data or content be relied upon for investment activities. Please do your own due diligence before making any financial decisions. Data and information cited from sources will not be updated after publication.