Auto-invest tools : how to become a Jedi Master and avoid nasty surprises

Auto-invest tools are great....

Most P2P investors will use auto-invest tools at some point. Auto-invest tools are effectively a set of 'buy' orders given to a platform, instructing them to purchase loans at a date in the future. The investor defines the loan parameters that must be met for a loan to be purchased. When the investor has cash available in their account, the auto-invest tool automatically purchases loans. This saves time for the investor and helps to make sure that cash is reinvested quickly, which helps to maximise interest earned. 

The problem with auto-invest tools is that they work very, very quickly and cannot be 'undone'. Once set, they can purchase thousands of loans within seconds. Many, many P2P investors have ended up with loans in their portfolios they were not expecting, because they didn't spend enough time on their auto-invest settings. It is not possible to reverse the actions of the auto-invest tool, so it makes sense to be strategic and careful when using it. 

Auto-invest golden rules

1. Use all the setting options

Platforms such as Mintos provide up to 14 different settings for each auto-invest portfolio. It's important to review each one. In almost every case higher quality and lower risk loans can be found by using the setting. For example, some lenders offer loans with a wide range of LTVs, but with the same interest rates. If that is the case, set a limit on the LTV to pick up loans with lower risk profiles.

2. Set minimum interest rates carefully

One of the most important  settings is the minimum interest rate. Set it too high and you won't buy any loans. We recommend setting at a rate which is in line with the best rates available currently for that profile. There is a big risk in setting the minimum rate too low. Keep in mind that lenders and platforms can see where the minimum rates are set. If you set a rate that is below current interest rates, you are signalling that you are willing to accept a lower rate. This can result in lenders cutting their interest rates to take advantage of the investors who have set low auto-invest interest rate orders.  

3. Only use auto-invest when there is little advantage in self selecting

Some platforms make auto-invest mandatory. However others allow self selection as well as auto-invest. In these cases we recommend using auto-invest only when there is not much advantage in self selecting. For example in situations when you are purchasing loans with buyback guarantees, or when almost no information is provided (typically for personal loans). Never use auto-invest for loans such as real estate development loans or any other loans where careful analysis is required. In this situation the auto-invest tool can end up purchasing loans that the self-select investors didn't want, which could mean the loan has a high risk profile or other issues. 

4. Use multiple auto-invest orders, rather than one

We recommend setting up multiple auto-invest orders rather than a single one. There are several reasons for this. Firstly, if an auto-invest tool does not work as expected, it only affects some and not all of your portfolio. Secondly, it creates more tailored and optimised sub-portfolios. For example, you may want to set a lower minimum rate for some loans and a higher minimum rate for others. For multi-lender platforms such as Mintos, it can make sense to establish a tailored auto-invest for each different lender you wish to purchase from. 

5. Use the settings that can reduce your risk

Make sure that you set the auto-invest to only purchase loans that have no missed payments (called 'current'), even if there is a buyback guarantee in place. Limit your exposure to any single loan, and only purchase loans from solid lenders. Some auto-invest tools allow you to also only purchase loans that have been issued before a certain date. Make use of this setting - if a borrower is 'current' and has been paying down the loan for 6 months, the risk profile is lower than for a brand new loan.

6. Keep monitoring the performance and settings

It's important to monitor the performance of an auto-invest tool to make sure it is working optimally. It is common for the auto-invest portfolio to become smaller than targeted. This may be because interest rates have fallen below the minimum level set, or because a lender has less loans available. Regularly reviewing the settings can help to ensure that funds remain fully invested, and returns are maximised. 

Leave a Reply

Your email address will not be published. Required fields are marked *