How does investment in loans compare with stocks over the long term?

16.02.2021

mintosblog

No matter what the asset class, a prudent investor will always regard investment as a long-term venture. While the idea of earning high returns from a short-term investment sounds very appealing, the reality is that the unpredictability of global markets and world events are part of what brings an element of risk, that can’t always guarantee 100% success. 

Previously, we’ve written about the importance of diversification to help mitigate the risks brought about by market volatility. But as well as ensuring good diversification, your investment horizon also plays a key role in creating a profitable portfolio, particularly when global markets are on a downturn. By investing steadily over a period of years – rather than an occasional flutter when the markets are in good shape – investors can offset risk and market volatility to ensure greater financial stability in the long term.

2020 and the global recession

 

2020 was a challenging year for investors across every asset class. Whether they invested in loans, stocks, shares, or other commodities, many investors initially saw the value of their portfolio diminished as the world responded to the lockdowns and economic recession brought on by the COVID-19 pandemic. On Mintos, we saw a higher-than-average number of lending companies defaulting at the peak of the recession. While these defaults may have impacted on both new and experienced investors alike, if you consider average returns on Mintos since the platform began in 2015, it makes the case for investing over the long-term even stronger. 

To demonstrate, the table below shows the annual time-weighted rate of returns (TWRR) of all investments on Mintos, at assumed rates of recovery between 0% – 100%.

Across all recovery assumptions, the data shows that average time-weighted returns have been consistently high until last year, when the financial disaster hit. Furthermore, if we assume a 50% recovery of funds¹, even a loss of 0.69% in one year seems relatively modest given the scale of impact that COVID-19 had worldwide in 2020.

Compare TWRRs across the same time period for the MSCI World and Bloomberg Barclays Global High Yield indexes² (shown below), and you’ll start to understand how an alternative investing platform like Mintos compares against these global stock exchanges. In terms of the indexes we’ve chosen to compare Mintos to, MSCI World reflects returns from a global and well-diversified portfolio of stocks, while the Bloomberg Barclays Global High Yield index reflects returns from a global, well-diversified portfolio of high yield bonds.


For instance, while the stocks (MSCI World index) had higher average returns than Mintos in 2019 and 2020, its overall volatility and somewhat lower returns in the period beforehand (2015-2018) means that by consideration of the whole period, Mintos returns are comparable but also more consistent, meaning less risk for investors. Likewise, high-yield bonds (Bloomberg Barclays Global High Yield index) had a similar level of volatility, again meaning overall returns are comparable to Mintos.

Perhaps the best way to evaluate profitable returns over a longer period of time is to consider it in terms of annualized returns across the whole 2015-2020 period. 

As the table shows, even someone who started investing on Mintos as early as 2019 and continued investing into 2020 would have seen a decent return of 4.59% (at the given average recovery rate of 50%). Even in the worst case scenario of 0% funds recovered, an investor who had been investing since 2018 would still see a small overall profitable return.

Now, compare annualized returns from Mintos’s assumed 50% rate of recovery with annualized returns from the same two global indexes as before:

If you refer back to the table that compares TWRRs between Mintos and the two global indexes, you’ll notice that under normal market conditions (between 2015-2019) returns for the two indexes varied unpredictably each year, whereas Mintos offered more predictable and steadier returns. Looking at the annualized returns for all here, we can see that even with the 2020 recession, the overall gains and losses suggests that investing in loans is relatively similar to investing in stocks when considered over the same period – and if you compare annualized returns between Mintos and the Bloomberg Barclay Global index since 2018 or earlier… Mintos actually outperforms.

While expected returns over time are similar, they aren’t identical, which supports the idea that loan investment and stocks are non-correlated asset classes. This means long-term investing in both could be advantageous for investors who want to diversify without compromising on returns.

Long term investment means better returns overall

 

Whether you invest in stocks, loans or any other asset class, the data concludes that an investor who invests over several years will feel the impact of financial market turbulence less than someone who has been investing over a shorter period of time. 

For experienced investors, this may not be a shocking revelation. After all, it’s already a given when it comes to the stock market that some of the best results in the face of market uncertainty are gained through long-term commitment, since – historically – the market always recovers after an initial dip. By continuously investing into a diverse portfolio of different loan types, lending companies, maturities, geographies and other variables over time, investors on Mintos can earn favourable rewards comparable to stock market returns – along with the advantage of lower volatility.


¹ 50% recovery of funds assumption best represents the actual percentage of recovered funds plus Mintos estimates for remaining recoveries from defaulted or suspended lending companies.

² Data assumption for both indexes are based on the model of a global and well-diversified portfolio, over the period that Mintos has existed 2015-2020.

³ The figure for each recovery assumption was calculated from the first day of each given year, until the last day of 2020.

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