Too good to be true

There is a basic truth that risk & reward are related, and that high returns must necessarily imply higher risk

Recent weeks have seen a spate of collapses in investment that investors assumed to be fairly low risk.

Just this week, Lendy has gone into administration, with 22,000 investors wondering if they will get their money back?

Lendy is – was? – a platform that connected people that had money to lend with people that needed to borrow it, so-called “peer-to-peer lending”. The idea is that by bypassing banks and connecting people directly, costs can be greatly reduced, with benefits to both sides, and a small fee to Lendy for making the connection.

One well-known media commentator described it on Twitter thus:

“Collapse of peer-to-peer lender threatens major loss for investors tempted by 12% returns.” To which another replied, “Collapse of peer to peer lender threatens major loss for speculators greedy for 12% returns.”

A few months ago, London & Capital Finance mini-bonds, which were being marketed, in some cases, as fixed-rate ISAs, with interest rates as high as 8% per annum, went bust, leaving over £200 million of investor’s money in doubt.

Prior to the L&C debacle, I was asked by a couple of clients about these mini-bonds. To be fair, it is sometimes difficult to see the catch, but it always comes back to one simple fact of life – if bank interest is 1%, the only reason another investment is paying 8% (or 12%) is that it carries a higher risk. Probably much higher!

What part of “too good to be true” is unclear?

As ever, please feel free to contact me, or one of the excellent team at Navigator, if you have any financial planning queries. We will do our very best to help.

David Crozier CFP
Chartered Financial Planner

Please note that past performance is not a guide to the future, the value of an investment and the income from it could go down as well as up. You may not get back what you invest.