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Bondora introduces fractional calculation starting 27 of april 2018

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What is it?

This is a major update to Bondora system which will ensure an equal distribution of a loan repayment to investors. It’s easy to forget that the loan you funded with your investment is likely to be jointly funded alongside the investments of thousands of other investors – when a borrower makes a repayment to this loan, it’s important that each investors receives an equal amount of that repayment based on their total share of the loan. Even more so, this applies to payments received from our collection and recoveries process too.

What are the benefits to you?

  • The even distribution of debt servicing fees – Making it easier for you to manage and keep track.
  • Faster website and services – More specifically the overall speed of reporting, especially for users with a large number of loans.
  • More precise calculations – With results calculated up to 10 decimal points, ensuring fairness for everyone.

Why have Bondora changed this?

You may notice that from time to time, the debt servicing fees applied to your investments in recoveries may not show an even amount each month. The Bondora engineering team has been working hard on an update to the system called ‘fractional ownership’ which will now make all loan repayment distributions equal across all payments for each investor.

Currently, the distribution is equal but the equality is achieved over multiple payments (by recording how ‘unfair’ the previous payment was and then correcting it the following time for the customers who received more or less). Now, such fluctuations with payments will be eliminated.

How does it work?

All calculations regarding past and future investor shares in the cash flows will be based on a loan schedule multiplied with their share (known as fractional ownership) with results calculated up to 10 decimal points. Payments to your Bondora account will also be made in amounts with up to 10 decimal points, however withdrawals to real cash are still limited to 2 decimal points as smaller increments are not yet supported by the traditional banking system (Not surprising…).

Thanks to this, even investors who own a €1 part of a €10,000 loan will always get their fair share of the repayment.

How will this affect your portfolio?

For a small number of investors, the present value of their portfolios will slightly change due to the added precision of the calculations. These changes are extremely small, nevertheless for those whose portfolio value decreases by any amount, Bondora will compensate them the difference.

The average compensation amount will be €0.25 and the largest being €25. With this in mind, the planned principal and interest amounts will also be recalculated in the cash flow reports to reflect these changes. This will be done automatically, so no action is needed from you.

The estimated release date for this update and the compensation is Friday 27th April.

What is Cash Flow? Find out how you can use it to your advantage

Cash, and more so the lack of it, can be a determining factor in whether you will achieve your goal of financial freedom. In short, cash flow is the net amount of cash that is flowing in and out of your accounts each month. Traditionally, this has been an important measure for business owners as they can keep track of how much money they are generating from customers that they offer their services to. It’s also important for them to know how much they are paying out each month for things like business loans, office rental and many other expenses.

However, the same cash flow measures can be used by individuals like you and me. Let’s say that each month you earn €2,000 net per month from your employment, €500 from your side hustle and €200 from your investments. But you need to live, so you can deduct your mortgage payments, car costs and any other expenses you have. The result of this will be either a positive or negative cash flow.

cash flow money

Cash Flow from P2P, Real Estate and Income vs Accumulation Funds

One of the most popular asset classes today is Peer-to-Peer (P2P) lending, notably for the opportunities it gives investors to become the bank and receive a monthly cash flow. Let’s say you invested €10,000 across thousands of loans from a range of risk ratings, loan durations and countries. Every month, the borrowers will make their loan repayments which consists of principal and interest, you then have the option to withdraw this cash flow or reinvest your profits to compound your interest and maximize your overall returns.

Quite similarly, real estate investments work in a comparable fashion. If you buy a rental property for €100,000, each month you will receive a payment from the tenants (e.g. €600 per month). You might use some of that to pay the remaining mortgage on the property or add it to a growth account to save a deposit for another property. An important difference between this and P2P is risk, as previously mentioned you can spread your risks across thousands of loans where as you rely on the payment from a tenant in a single property – if they default then there is no other cash flow. Protect your cash flow by diversifying within your chosen asset class.

If you are familiar with investing in equity funds, it’s likely you have come across the accumulation vs income conundrum. Simply put, an accumulation class fund will reinvest any cash generated from the investments within back in to the fund, over time this can significantly increase the size of your total pot. On the other hand, an income class fund will pay any cash generated from the investments back to you to use as you wish. This is for those who are looking to increase their total monthly cash flow amount and are not necessarily focused on the long-term growth of their investments. Almost always, the accumulation fund will be the most profitable in the long run.

Take a look at the graph below:

income vs accumulation-en

The same principle can be applied to your investments with Bondora, as the only difference is the underlying asset (consumer loans rather than equities). In the graph above, we have compared the growth of a portfolio with the same interest rate, starting capital and duration, the only difference being reinvesting your monthly cash flow compared to withdrawing it each month. Using our Portfolio Manager, starting with €10,000, an outlook of 5 years and a respectable interest rate of 10% per annum, there’s a stark differential in performance.

In fact, by simply allowing the Portfolio Manager to reinvest your monthly cash flow, your account value at the end of the 5 year duration would be 33.9%, or €4,462 larger (€17,623.42) than if you did not (€13,161.42). This is literally how you can “Make your money work for you” with minimal effort.

Cash for thought

Cash Flow Quadrant

Do you recognize the quadrant above? If you do then you are most likely well accustomed to the benefits of having a positive cash flow, congrats! For those who are still puzzled, this peculiar yet simple diagram is the brainchild of Robert Kiyosaki, the king of cash flow. As the creator of the Cash Flow Quadrant, Kiyosaki divides the general population and their mindset in to 4 separate categories:

  1. E: Employee – This person values job safety and security over everything.
  2. S: Small business owner/Self-employed – An independent person who wants to do everything related to their business by themselves.
  3. B: Big business owners – People who create a large business run by intelligent people.
  4. I: Investor – Those who make money work for them.

His main theory is that people should learn how to become big business owners and learn how to become investors, as the people on the left side of the quadrant only have active income compared to those on the right earning passive income. Creating a viable and sustainable source of passive income is seen as a core principle of achieving financial freedom.

Source: www.bondora.com

10 tips for start-up investors on the capital market

If we want to invest in the capital market, it is very important to have patience and not to act on emotional impulses.
We need to control our emotions and not let ourselves be influenced by the subjective aspects when trading on the stock market.
Greed and fear are the biggest enemies of investors. If you’ve decided to sell a title at a 25% profit, respect that threshold because otherwise it’s possible to lower your profit as a result of further corrections. And the mutual is true, if you have set a loss of 15%, do it, otherwise it is possible to record a larger loss.

10 tips for start-up investors on the capital market:

1. Do not invest in the stock market the money you need right away. Do not plan what to do with the money you will earn from your stock investments, because the stock market is unpredictable, and no matter how much experience you have or how many growth signals you may notice, the market may contradict you and fall.
It is not advisable to invest in the money programmed for important events such as schooling, medical interventions or other projects, because you may have less pleasant surprises.
It is recommended to invest in the amount of money that you may be deprived of for a period of time. It is said to “forget” about the money invested in the stock exchange. That does not mean you do not watch the market because it will do all the work for you, but not include that money in the next financial plans.
Also, do not invest in reserve money set aside for unpredictable situations, because it may not be to your advantage to sell whenever an emergency occurs!

2. Do not invest the borrowed money on the stock exchange. Borrowed money is interest-bearing and must be repaid within a certain amount of time. If the stock market does not confirm your theories, you will have to take money from other sources to cover any losses and to repay the borrowed amounts.That way, you may unbalance your budget over a long period of time and it will be quite difficult to recover financially. Reimbursement of borrowed money, which you have not benefited from due to decreases, creates a lot of stress and you will remain with a negative image about the capital market.

3. Investments on the stock exchange start with small amounts. It is much more comfortable to start trading small amounts in psychological terms because potential losses can still be small. All trading principles and rules are the same regardless of the amount you invest, whether you are a start-up investor or have a low-value portfolio. It is much easier to gain experience with an account with less zeros because you are more relaxed and you can learn from your own mistakes.

4. Start with a demo account in which to create a virtual portfolio. This will help you better understand market mechanisms and build your own information and analysis system. When you start to gain knowledge and figure out how the stock market works and are happy with the returns you get from the virtual portfolio you can start trading on a real account. You can still keep your demo account to test new strategies and make changes to your portfolio, which you are not sure you want to do in the real market. You will gain confidence in yourself and the capital market will no longer seem an unacceptable field. It costs you nothing to make a demo account, but you can gain a lot of experience.

5. Do not invest in complex financial instruments at first. Another important tip is to approach the market from simple to complex. From the basic investments that you know and know how it works and how you can gain, diversify your portfolio with more and more complex financial instruments as you gain experience.

6. Do not wait for the best price. When you have decided to sell or buy, do it at the market price. The capital market is dynamic and constantly moving, and no matter what plans you have, the market will try to contradict you. If you are a long-term investor, small price differences should not be the reason why you can delay a transaction. The more you expect the titles you are targeting to reach a certain price, the more you risk losing your earnings, or even worse, you can record higher losses.

7. Set up an investment strategy and respect it. Once you have identified the type of investor you are and your attitude towards risk, you can begin to make a strategy for future investments. The most important thing about the strategy you set is to respect it and not to change it frequently. If you oscillate between two or more strategies, you risk not to get the expected results. Discipline is one of the most important qualities of an investor, be it beginner or advanced.

8. Do not invest all the amount available in a single financial instrument. The likelihood that all the financial instruments you invest in will decrease at the same time is rather small. By allocating financial resources to different destinations, you can cover the potential loss of some of your investment through the gains made by others. No matter how tempting an investment is, do not bet on a single card!
Diversification can make a difference between a winning investor and one who still expects his investment to become profitable.

9. Invest in the long run, so downtimes will have time to recover and on long-term you can make profit.

10. Invest in blue-chips. Blue-chip shares are the most liquid stocks with high capitalization and consistent financial results over the years. These shares have increased their value over time, due to the confidence shown by investors, confirming each year without disappointing their shareholders. These shares are usualy part of a number of stock indices, which once again demonstrate their quality of capital market stars.

Last but not least, when investing in the capital market, you must always be informed and not invest based on rumors. Any information needs to be verified from multiple sources and as far as possible these sources must be reliable.

Do not forget that in order to be an investor you need to spend time on this activity and become actively involved in decision-making.

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