By guest contributor John Baini, CEO, TruePillars
There are various fixed income investing options available in the Australian market and we hold the view that peer-to-peer lending (also referred to as marketplace lending) deserved to be in the discussion.
A good starting point would be an evaluation of the risks of investing in the product closest to my heart: business loans. I’ve decided to do this by making a comparison to an investment class most investors are familiar with – dividend stocks.
Exploring listed equities
During this period of prolonged low interest rates, there has been an ongoing media narrative along the lines of yield-seeking investors having no alternative but to switch into dividend stocks. This is understandable with some of the better stocks yielding 8%-9%, the ASX 100 averaging just over 7% for the past 12-months and the All Ordinaries just over 4% over the past 30+ years. (Source: www.marketindex.com.au).
The question is what level of risk are investors taking in order to access these dividend yields?
Below is a chart showing the movements in the ASX 100 index over the last 10 years. I have specifically chosen the top 100 Australian listed stocks because these are often afforded the title “blue chips”.
(Source: www.marketindex.com.au)
Whether over the whole 10-year period or any point in between, the one consistent theme is volatility. If you were unfortunate enough to start investing in a product that tracked the ASX 100 in 2007 you would still be waiting for your capital to recover losses.