Risk Is A Dirty Word For Many Investors

Young woman poised at the edge of a precipice

Peer-to-peer lending is no-go zone for forty per cent of people, who say they will not take any risk at all with their money, even if interest rates are so low they are eating into their capital.  This is a major educational problem for the industry, and some financial advisers are calling it 'delusional'.

A survey of 1,000 savers conducted this month by the peer-to-peer lender Credit Peers reveals that a significant minority have talked themselves into a situation where they have no chance of beating inflation.

As reported in Peer to Peer Finance News:

  • 65 per cent said poor rates were their biggest frustration with mainstream providers
  • 40 per cent said they were never willing to take a risk with their money, no matter what the returns may be

Professional Adviser magazine called investors "almost delusional" for expecting high returns in the current economic environment from no risk., and quoted Martin Bamford, of Informed Choice:

 "If you're getting 1% on your money these days with no risk you're doing quite well." 

So why is only one investor in eight - 13 per cent -willing to take the risks to get returns that most of them say they want?

This paradox - many economists would call it irrational behaviour - is not something specific to peer-to-peer and crowdfunding. Nor is it a by-product of the current political climate. (Torsten Hartmann, CEO of Credit Peers, thinks it is, but we beg to differ.)

Human beings are notoriously bad at assessing risk accurately.

We worry about dying in a plane crash, but not in a car accident, even though your chances of dying in a road traffic accident are much higher - more than 2,000 times higher, in fact!    

Investors, savers: you owe it to yourself to:

  1. Understand that everybody starts out with mistaken ideas about risk
  2. Promise yourself that you will get better at it.
  3. Start making investments based on accurate understanding of risk.

If you do that, you will make higher returns, the smarter you get. And it doesn't learning anything difficult or obscure; it's just basic numeracy skills.  

The results of the Credit Peers survey are consistent with research from last autumn, that discovered one in six investors admitted that they did not understand the risks in their investment portfolios.

We suspect that there the one in six are the investors who are smart enough to realise they need to become smarter. You need to be one of that crowd. Another Crowd wants to help you.