Omaraha loan volumes and interest rates

For a significant amount of time Omaraha was one of the P2P lending sites that offered highest returns. This was largely due to the way their auction system worked – investor could essentially bid how much money they were willing to invest into a loan and at which rate. The system started filling the loans from bottom up (lowest to highest rate) and then the person taking out the loan got an average rate based off those.

This meant that if you kept an eye on how the loans got financed you could get into loans at ridiculously high interest rates while the borrower could still get a reasonable total rate. Best example of this is probably in the 7- and 10-year loans which have been removed by now, where investors were rather shy to commit, meaning you could get into loans at the max rate allowed – 60% gross (48%net for investor). This was also possible for 5-yr loans.

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All good things must come to an end though, and the 7-yr and 10-yr loans were removed (largely due to the total rates failing to comply with the legal max interest rate limits) and the cap for max interest rates was also brought down, so you could no longer make autobidders with such insane rates. Good for the borrowers, sad for the investors.

Current situation

Somewhat as a result of those changes the average interest rates started to come down. A section of borrowers disappeared from site (those who got higher rate loans, but were no longer able to), and since the site itself had become much more popular among investors and the total available cash number kept increasing (up to 1mil at times), which started to push down the average rates.

As a result the drop has actually been rather immense. Another contributor has probably been the fact that Omaraha has elected to be less of a black box – before you had to take the time to figure out the interest rates yourself, now, however they show you the maximum rates that offer a chance to get into loans. Today’s stats:

rates

As it stands, since the buyback rate offered (used to be at 80% for a long time) has started to slide back closer to 60%, then clearly the squeeze is two-fold both less security in buyback and lower interest rates. Since they’re also reduced the max amount per loan that an investor can contribute, this makes previous strategies much harder to use as well (it’s no longer as efficient to “ladder” interest rates for separate autobidders).

As a result Omaraha has dropped to somewhere in the middle of the pack when it comes to returns with one significant downside – lack of a secondary market, which means making an exit is much more difficult than on some other sites. As a result, for the first time in two years I’ve actually taken out some money since it started to build up too much.

 

Building a portfolio strategy

When you’re just getting started with investing, then your portfolio strategy is pretty much aggressive growth all the way. After a while though the issue of balance starts coming to play, which is what I’m starting to struggle with right now.

How much of what should you have in your portfolio?

There are about as many rules as you can imagine about this. One thing that people generally agree on is that your portfolio should have more than one asset class included. For me, I have three – social lending/crowdfunding, stocks and real estate. Beyond that though things get complicated – how much of what should you have? When to rebalance? How to rebalance before a crisis? How to take into account cash flow vs capital growth?

correctportfolioIf I visualize the more actively managed part of my portfolio this is the result. The equity I own in the Sõle apartment is worth just about as much as most of my other investments combined. This sets my portfolio to something like 50% real estate equity/20% stock market/30% social lending.

Is that a good or a bad balance? On paper it seems fine since no asset class is above others, and real estate is a capital heavy type of investments. However, if I purchased another apartment then real estate equity would take up almost 70% of the whole portfolio balance – not a good way to go in my opinion. Also, whole social lending grows organically quite quickly due to money being reinvested then with stocks you need to contribute actively, especially for Baltic stock.

So, in a way I’m currently trying to figure out a strategy for how to balance my portfolio better. I’m fine with taking larger risks since I’m still young, which would mean contributing more to social lending. However in terms of a potential crisis real estate might be better in terms of steady cash flow, even if it does eclipse other types of investments in terms of capital value. I’m leaning towards not letting any asset class climb above 50% of portfolio value but that might be a tricky balancing act if I want to get further into real estate. What’s your strategy on this?

 

 

Of portfolio balance

There are many different portfolio balance theories out there in the world of personal finance. Some are based on risk management, some based on diversification, and some have a logic so complex that it takes a while to even figure it out. Whichever portfolio strategy you use, one idea is constantly emphasised – you must diversify between different asset classes and markets.

Why diversify across asset classes?

The somewhat classical theories focus on three main asset classes – stocks, real estate and loans. Other options include metals, entrepreneurship etc. The idea behind diversifying asset classes is that they behave differently in different market situations. While stocks can be quick to drop, they can also generate incredible short term returns and are considered relatively stable long term.

With real estate the main value is the idea that you own a physical asset – while a company may go bankrupt then you still own an apartment or a house and while it may drop in value, it won’t completely drop to zero. Real estate and loans also help generate cash flow in a way that stocks generally don’t.

This means that to reduce risk levels you should have different asset classes in your portfolio because in case one asset loses value the others may keep theirs for longer. In the case of a big economic crisis of course all parts of the market drop, but different asset classes recover at different speeds and being able to generate cash flow while you wait for capital growth recovery is valuable.

Why diversify across markets/geographically?

In the case of social lending diversifying across hundreds of loans helps you manage risks by betting on the fact that not all regions of the country lose jobs at the same rate. In case of a crisis it’s clear that the less wealthy regions of Estonia will be hit harder while the bigger cities are likely to have more job opportunities therefore people will be more likely to pay back their loans.

For stock markets geographical diversification in its broadest sense means picking different markets. I invest both into the Baltic market and into the US market. Maybe soon I’ll add in general European markets as well. The benefit of this is easy to see – if you take side by side the growth charts of Europe and USA, then you can clearly see that they don’t always move in a similar direction, which means more stability for your portfolio.

Why diversify across different risk classes?

Everyone who invests wants high returns. It is however important to keep in mind that higher returns are linked to higher risks as well. This means that while you may enjoy higher returns when the market is climbing upwards then higher risk investments also mean a much bigger hit when the market takes a steep downwards turn.

Generally stock indexes are considered much safer than individual stocks due to the lowered risk provided by higher diversification rates. Social lending is inherently riskier than real estate backed loans where you have less of a chance of walking away empty handed.  The same way smaller apartments close to city centres are generally considered lower risk since they’re likely to maintain renters’ interest even in the case of an economic downfall.

How to assess your portfolio?

The easiest way to look at whether your portfolio is balanced is to either write it down in numbers or have a visual outline of your portfolio. Taavi I. wrote a nice piece of code that allows you to visualise your portfolio and I must say I quite like the visual aspect of it.

portfell1704

For example the image above is the balance of my current portfolio. It lists all social lending, stocks, indexes and crowdfunding. As you can see, my portfolio is very heavily influenced by whether or not Bondora does well (Bondora used to be 75% of my portfolio) so I’ve been working hard to push it down to 50% overall portfolio value.

Ideally your portfolio should be close the 1/3 in each asset class. In my case what is arguably missing is real estate (since Crowdestate is not pure real estate), which is why I set the goal of getting into rental real estate this year. Overall though, you can see that my portfolio is getting better in terms of overall balance. While my portfolio isn’t all that big yet, then getting into the habit of it being balanced will help a lot in the long run.