137 In P2P Financing (or any investment), diversification is key to minimize loss

In P2P Financing (or any investment), diversification is key to minimize loss

In my previous articles, I shared my participation in two of the six approved P2P Financing companies. I also shared I used auto invest and limit my investment amount and time frame. My idea is to diversify, and to try to minimize the potential loss caused by any default. To me, this is a high risk investment — we just won't know when things will go wrong.

Well, yesterday I received an email newsletter from a famous blogger. He shared his first loss in Funding Societies — the largest P2P Financing company in Malaysia. He has been with Funding Societies for quite some time, and has been earning 10+% of interest.

Then suddenly, he received email from Funding Societies that one of the loan could default. This loan is for a period of one year. The first one or two payments were on time, but the subsequent two or three were late or not received.

After reading the email, actually it could only be categorized as a potential loss only. Funding Societies has met up with the borrower and has reached agreement to restructure the loan repayment. The borrower borrowed in anticipation of a business grow, but did not materialized. Businessmen planned for potential expansion but future is always uncertain.

The blogger gave some advice on how to know the background of loan and the borrower. On top of all, his advice is diversification is the way to reduce loss. After all, Funding Societies' statistics showed their default rate of their loans is only slightly above 1% and lower than 2%.

When we come to investing style, there are always arguments of concentration and diversification. Both camps has their success stories to tell. The famous value investors Warren Buffett and Charlie Munger practiced concentration. Their money are all in Berkshire Hathaway, and Berkshire Hathaway has its money in few stocks only.

However, for small investor like us, I think we should we should practice diversification. We do not have the time and knowledge to study our investments. If I put my money in one stock, and it goes with the wind, it would be disastrous for me and my family. We may not have the time to regain the loss.

When Warren Buffett closed his first partnership way back in 1970s, he asked Bill Ruane to take our his partnership since some of his investors wanted to stay invested in stock market. Bill started Sequoia Fund, and practiced concentration. The fund performed well because of the stock selection but it also suffer loss because of concentrating on the wrong stocks.

Today, we have many type of investments, and within each investment, there are so many companies to choose. We do not know which will do well in which market cycle, so our best bet is to put some here and some there.

In Malaysia, there are few stocks like Public Bank, Digi or Genting that has proven to bring wealth to their shareholders. In those stocks, bought them, forget them, and you are rich. But when they we first listed, nobody knows they are wealth creator,  just like nobody knows Berkshire Hathaway will be the greatest investment company.

Coming back to the P2P Financing, it is a new investment industry for small investors — the maximum investment per person is RM50,000. Six companies are available, we can put some money into few of them, and further spread our money into more loans.

Luckily, the blogger's exposure in the default loan is only a small fraction of his total investment. Otherwise, he may suffer great loss and many sleepless nights.

With diversification in mind, I chose two companies that provide short term loans. I am not ready to lend to long term borrowers.

Funding Societies has both long and short term loan but I set auto bot to participate in short term loans only. B2B Finpal only loan to short term borrowers. I set the investment to even shorter period.

If you too want to diversify some money into B2B Financing, you may consider them. All the two companies provide referral scheme. And mine are

Funding Societies:- http://promo.fundingsocieties.com.my/referral-program/?r=jjqsmwav

Funding Societies rewards the introducer and investors with RM50 when investor sign up and invest a minimum of RM1,000. So it benefits both of us.

B2B Finpal :- Put IN001029-Teo Soon Ann in the last column Referral Code when doing registration at https://prod.b2bfinpal.com/investor/registration.

136 B2B FinPal — my second P2P lending company

B2B FinPal — my second P2P lending company


After I joined my first P2P lending company  —  Funding Societies, I surveyed other P2P lending companies. I get to know Funding Societies has the biggest market share, followed by Fundaztic and B2B FinPal.

Actually, Fundaztic is the second company I joined but I did not put money into it. This is because Fundaztic needs RM2,000 to have auto-investment facilities. And I do not want to put that much. Another thing is Fundaztic's lending are longer term — up to 2 or 3 years. I also do not want to lock my money that long.

(Auto-investment is a function where we as investors put our criteria into their system. When an opportunity that meet our criteria appears, lending company will help us to bid for the opportunity. Without auto-investment, investors can always select manually.)

Then after that I surveyed B2B FinPal. They need RM1,000 for auto-investment and their lending are very short term (mostly I see 2–3 months). This short lending period gets me interested. I set the minimum investment amount for each lending to be RM100. If each lending can give me 0.5%–1% net interest per month, it's very good for me — consider that I get almost nothing in savings account.



Registration

Funding Societies and Fundaztic are easier to open account. Simply fill up the online form. For Funding Societies, wait few days for them to activate the account. For Fundaztic, they will bank in a random amount of money into our savings account as verification code. For B2B Finpal, we need to print out and complete their agreement.

(I think Funding Societies has improved their registration process. My mentor told me he had to print out the agreement as well.)



Lending

After joining those P2P lending companies, I realized that so many SME need funding. Some need big amount, some small, some longer term, some very short term. I think each P2P lending companies has positioned themselves in the area they want to be.

Funding Societies has both short term (3 months invoice financing opportunity) and long term (1-2 years business term financing). Fundaztic is mostly longer term (above 2 years) financing. B2B FinPal short term financing only. Of course, shorter term financing comes with lower interest rate.

I received emails everyday from, almost all three companies, about lending opportunities for me to consider. This is such a big market. P2P lending companies must be a great help to them. At least better than going to Ah-Long funding. ^_^

I think by this rate of lending opportunities, minimum investment amount of RM1,000 will be used up very soon. About a week or two in Funding Societies, about RM400 has been allocated for lending.



Fees

All three companies do not charge account opening fee. However, please note the platform fee (or the fee charged from repayment or sharing on interest received). Funding Societies has a low platform fee. B2B FinPal platform fee (sharing rate) is actually quite high. That said, B2B Finpal offered undeniably me an opportunity to get interest rate higher than conventional savings account.



Never forget — Risk

Although P2P lending is regulated in Malaysia, and each licensed companies has their set of lending criteria, I see it as a high risk investment because the creditor can possibly default. The default rate is perhaps very low, but we should not perceived it to be low risk. "Low default does not mean no default". That's why I do not want to lock my money for long term.

In investment, never forget "high risk, high return". In equity investment, we always aim for 8%–10% type of compound return. In P2P lending here, I see the interest rate can 10% or 15% per annum, so it must be of higher risk. So, I want to control each participation to the minimum requirement (RM100), and shorter term lending.



Referral Scheme

All the three companies provide referral scheme. And mine are

Funding Societies:- http://promo.fundingsocieties.com.my/referral-program/?r=jjqsmwav

Fundaztic:- https://p2p.fundaztic.com:443/generalize/regist?member=e1hvJ8%2Fctu1o9eb9s9%2FZXA%3D%3D,

B2B Finpal :- Put IN001029-Teo Soon Ann in the last column Referral Code when doing registration at https://prod.b2bfinpal.com/investor/registration.



Last word

Never forget to go for regulated investment scheme only. And the company must be licensed. I am glad many investment schemes in Malaysia are regulated. So many scams has happened in Malaysia, and so many innocent investors lost a lot of money.

With that, my exposure in P2P lending is consider complete. What follows is the monitoring process of each companies operation, opportunities, and most importantly the default rate.

135 Funding Societies—my first investment in P2P financing company

Funding Societies—my first investment in P2P financing company

Peer-to-Peer (P2P) financing is a new type of investment approved by Securities Commission Malaysia in 2016. Meaning it is a regulated investment scheme in Malaysia. All these while, our investment vehicles are mainly built around bank deposits, bonds and equity. Since we see volatility in stock market, some investors may like to diversify into other investment vehicles.

Investopedia defined P2P financing as:
Peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios. P2P lending is also known as social lending or crowdlending.

The first time I get to know P2P financing and equity crowdfunding was during a MFPC seminar in 2017. At that time, I remember Crowdo, FundingSocieties talked about how these types of investment works and how investors can potentially benefit. But I did not invest into it because they were relative new and I am a bit uncertain. After all, I am a timid investor.

The stock market is quite volatile since beginning of 2018. I started to look into other alternative investment vehicles. My mentor, who invested in P2P during the mentioned seminar, said the P2P he invested is giving quite consistent regular income. So, he recommended me to Funding Societies.

Funding Societies is one of the six registered P2P lending company. It claims to be one of the biggest in the industry.


Opening Funding Societies account

Opening a Funding Societies account is relatively easy. I only have to click the referral link my mentor sent to me. Then I simply have to fill in the required info, upload my NRIC, and also bank in minimum RM1,000 for investment purpose. The website said the process should take 2 working days for their approval. In my case, it took me about one week.

After account being approved, I log in to setup auto investment system. I have to choose the lending type, the tenure of lending, the interest rate I want, and the industries of lender.

In term of lending type, I can choose Business Term Financing and Invoice Financing. Business Term Financing lends to business that need funding for further expansion, the tenure is range from 1 month to 18 months. Invoice Financing lends to business that sell their future receivables or invoices to get immediate cash; the tenure is between 30–90 days. Well, I chose both.


The first investment

The auto investment kicked in when there is one opportunity yesterday (Aug 1). For this investment, the amount of RM100 is the minimum investment amount I preset. I remember the speakers said it is better to diversify, because a business can still fail or default on payment.

So, for this first investment, I have to monitor the how is the return. If everything goes well for the next 12 months, this financing will give me simple interest rate of 14% while the effective interest rate is 25%. To me, that is very high.

I am looking for seeing more financing opportunities. If the default is low, I can invest more. I am also eager to see how the account can grow.


Referral Scheme

I join Funding Societies on my mentor's referral, both of us will get RM50 when RM1000 is invested. Nice right? Likewise, I can refer friends to join Funding Societies — for me and friends to enjoy RM50 referral fee. My referral link will be

http://promo.fundingsocieties.com.my/referral-program/?r=jjqsmwav


Note: on Aug 2, 2018, LendingStar was issued Cease Order by SC because the firm was not registered to operate a recognised market, and was providing auto-invest facilities without licence or registration.

134 Liquid emergency fund—case for a coma person

Liquid emergency fund—case for a coma person	紧急基金—昏迷患者的个案
Mr Y, a sole breadwinner, suffered a stroke recently. After a few operations, he is now in coma state. His family has put him into a care center. At the moment, his family cannot claim any insurance, provident funds, socso because a medical report is needed. It can take quite some time for the report. In the meantime, the family needs cash for daily expenses and Mr Y's medical and caregiver's expenses.	家庭经济支柱的Y先生不幸发生中风。经过几轮的手术后，如今陷入昏迷状态。他的家里人把他安置在护理中心。在医生开出医药报告之先，他的家里人暂时不能索赔任何保险、公积金或工作险。等待医药报告旷日费时。家里人目前必须解决的是生活费以及Y先生的医药费的看护费。
This is where we see the importance of liquid emergency fund. In wealth planning, we always talk of putting aside at least 6 months of cash for emergency fund. In this case, 6 months buffer can provide enough time for family to adjust emotions, lifestyle, look for jobs, waiting for report and various claims.	这就让我们看到紧急基金的重要。在理财规划里，一般建议存取6个月的现金作为紧急基金。在这个个案里，6个月的备用基金刚刚好足够让家里人调整心情、生活方式、找工作、等待报告以及各项索赔。
Where can we keep the emergency fund? The first place is certainly some money in joint name savings account with ATM facility. Bank is the safest to keep money and ATM is the most convenience method to make withdrawal. However, make sure the ATM card is available and the pin is known to the spouse. The amount is probably 1-3 months expenses.	备用基金该存放于何处呢？首先可以是有提款卡的联名储蓄户头。银行是存钱的最安全场所，而提款卡是最方便的提款方式。当然必须确保找得到提款卡，配偶也知道密码。这里的数目可以介于1-3个月的费用。
Second could be a joint name fixed deposits account. Fixed deposit provides higher interest rate and easy withdrawal. The amount is perhaps 3-6 (or up to 9-12) months expenses, with different tenures.	其次是联名的定期存款户头。定存可以给予较高的利息，也相对容易取款。这里的数额可以介于3-6（甚至9-12）个月的费用。最好可以有不同的期限。
Third option could be a living trust. If the family has some assets that provides regular incomes (e.g. rentals from properties), they can move those assets into a living trust and structure that the trust will payout certain amount of money monthly. This type of trust can also protect those assets in case of insolvency.	第三的方法是设立生前信托。若是家族拥有若干可提供固定收入的资产（如产业租金收入）的话，家族可以考虑用该些资产来设立生前信托，让信托把租金收入每月给出一笔固定收入。这类的信托还可解决资产因破产而被冻结或拍卖。
Fourth options can be an endowment plan that pays out annual income. Endowment plan normally will pay out some money either by the end of first year, or maybe after 6 or 10 years depending on the term. The catch is if the premium has not been fully paid, the family still need to service the premium until they get the medical report.	第四可以通过储蓄保险的每年派出。根据所买的保险种类而定，储蓄保险可能会在隔年或者6、或者10年后每年派出钱。这里必须小心的是如果保费还没完全缴清，家里人还是必须暂时缴付保费直到医药报告出笼为止。
Fifth is keeping some money at home. I think most people practice this, although we all know it is not the safest. Most won't keep much money at home anyway.	第五就是收点钱在家里。虽然我们知道这不是最安全的做法，我想这是大多数人还是会做的事。其实一般人也不会收太多钱在家吧。
How then do you plan your emergency fund?	你如何规划你的紧急基金呢？

133 The three musketeers of wealth accumulation: Time, rate of return, and the amount invested

The three musketeers of wealth accumulation: Time, rate of return, and the amount invested	累积财富的三剑客：时间、回报率、投入资本
There are three variables that impact wealth accumulation: time, rate of return, and the amount invested. Of the three, two are within our control—time and amount invested. At least we can control when to start, and with how much. However, we like to focus our attention on the uncontrollable—rate of return. Investors like to look for the target of investment that can give superb rate of return. However, a rate of return higher than inflation rate is good enough for most of us.	共有三个变数会影响财富累积，它们是时间、回报率和投入资本。这三个当中，时间和投入资本是我们可以控制的。或至少我们可以决定何时开始、数目多少。可是，我们总是喜欢注重那不受控制的回报率。投资者总是喜欢寻找那可以给予超高的回报率。其实，对于一般投资者，一个比通胀率稍高的回报率已经足够了。
To illustrate the case, let's do some simulation. We will use financial calculator found in http://www.calculator.net to do some calculation.	让我们做点模拟看看。我们会用http://www.calculator.net里的理财计算机。
Safe to say almost everybody has roughly 25 years to save for retirement. So, let's say we can save RM500 per month for the next 25 years, at a rate of return of 8%. We can see that, the future amount is RM454K.	可以说一般的人都大约有25年的投资期限。让我们试算在25年里每月投资RM500于给予8%回报率的投资。我们可看到未来数是RM45.4万。
Now, what if another investor think 8% is not attractive enough and delay his investment. He may leave the RM500 per month in his savings account (and hoperfully he doesn't spend the money). How much would he get after 25 years? He would have RM154K 25 years later. How sad.	但如果投资者认为8%太低了，于是拖延不投资。他可能会把每月的RM500存入普通储蓄户头（还要希望他不花掉）。25年后，他会有多少钱呢？他共会有RM15.4万。好可惜。
Next we look at whether 8% rate of return is within reach. We will get the data from Morningstar (http://my.morningstar.com). Out the universe, I will use data from "Malaysia - Large Cap". Why? Large Cap is suppose to see less volatility, and particularly many investors are so fed up with large cap stocks because of their non-performance over the last 3–4 years. We can see that there are funds that can do 8% returns.	接着让我们看看8%回报率是合理的吗？我们从Morningstar （http://my.morningstar.com） 查找资料。我会用Malaysia - Large Cap这个类别。为什么呢？大资本股的波动一般比较不大，在加上近3-4年大资本股没什么表现，让许多投资者伤心呐。我们可以看到是有些基金能够给予8%回报率的。
OK, the questions will be whether RM500 per month is affordable. Of course, it may sound too high for those newly in job. So, he may start with a smaller amount. However, as he get more senior, he should get more increment. He should commit to a bigger amount. The important thing is he should not refrain simply because amount is small. Investing is a habit, and it's a marathon.	那，接着的问题就是每月RM500负担得来吗？当然对初入职场的新鲜人来说，这数目可能会稍高。所以，他可以以较低的数目开始。随着他的职龄增加，薪水也跟着水涨船高。到时，他就能负担更大的数目。重要的是别因数目小而不投资。投资也是一种习惯，而且更是马拉松长跑。