With all due respect Nordstrom...
Sorry, no relation. I wish.
... do you also hold your other investments to the same standards? Such as a vanguard investor re: due diligence on their guarantee corp, relevant case law/filings/etc all or any ETF purchase, same idea vs partial ownership in a legal entity that is then a partial owner in possibly thousands of individual companies. Did you read all these filings as well or where does it stop? Or is it because LC is 'newer' it deserves more scrutiny? Just curious , I glance over the prospectus, and invest in vanguard because everyone else does, more or less.
I realize LC is not a bank and that might be the biggest fear of all. Once you step outside of banking regulations and protection you're kinda dangling in the breeze! So just curious. I'm not an attorney lol. And I'm certainly not a banker.
I realize LCis risky, but I'm wondering if possibly you are putting It under extra scrutiny. Maybe it deserves it. But I do know as an example if,you want to track investing in vanguard, a vanguard etf and all the various legal entities around this process it's a bottomless pit, IMO. Maybe that's just me I guess.
I read the prospectus and annual reports for all my investments so that I know when they're changing the rules. That's pretty safe with mutual funds (especially Vanguard) and ETFs (especially large & liquid funds). However you want to know if they're temporarily waiving fees (that they might later reinstate) or if they're being compensated through soft dollars or whether international funds have excessive currency risk or whether your fund's brilliant management team has just left for some other company.
If prospectuses and annual reports were so easy to read, then we wouldn't need all the websites and blogs that tell us what's in those reports.
I also do it with stocks, although again with Berkshire Hathaway it's a more trustworthy read than you'd get from AIG or Bank of America or Sears or Goldman Sachs. If I can't understand the words in a prospectus, or figure out where the numbers came from, then there's a reason that the company can't write clearly. It's probably a bad idea to invest in a company that can't clearly communicate how it makes money. Even Berkshire gets grumped at for the way they group some of their companies' revenues in their annual reports, and they're happy to obfuscate the subpar performance of some of their subsidiaries.
In the case of Lending Club and Prosper, you're dealing with startup companies whose shares are only available to accredited investors. They need a lot more scrutiny. The companies have page after page of disclosures of their risk factors, letting investors know that they're on very shaky ground. Then just to compound the scary factor, they're selling you a product (a loan or a chance to lend money) that may or may not perform the way they believe it should. Then they tell you that if it doesn't work out... it's not their fault. The risk factors start on page 13 of each prospectus.
I actually think that borrowing from a P2P company is a better deal than lending through a P2P company, but borrowing is still a pretty bad idea. Here's today's post on P2P borrowing, along with a calculator to help decide whether it's worth the expense:http://the-military-guide.com/2013/06/03/peer-to-peer-loan-calculator/
Another reason to read annual reports: so that you know what your mutual fund is investing in. I manage my dad's financial assets, and they include a couple of Fidelity tech mutual funds. Last year the share prices took off... something like a 20% gain by that August. When I checked their holdings, I realized that Apple was 3%-4% of each fund. Most of the reason for their performance was due to the tech sector, especially that one stock. I rebalanced those funds to the bottom of his asset allocation, and I'm glad that I did.
And without a default yet, I've gotten 5% return in 4.5 months.I think this is one of the marketing aspects that sucks people into the investment without realizing:
- the time it will take for their money to be invested,
- the terms of the loans (three years, unless it's five years) and
- the much lower returns when money is withdrawn instead of reinvested.
I'm not exactly sure your point as it regards my first comment, but that 5% return is my personal calculation. It's not the number they give you. my account was $1500 in late January when I started. Now it's ~$1575, ~5%. I don't expect to get 5% every 5 months, but that's my current pace.
In response to the lower returns when money is withdrawn, it's the same thing with stocks. If you withdraw everything after 10 years, you won't average 7% for the twenty years. I do know what you're saying though - with LC you always have some cash sitting.
Both Lending Club and Prosper give you a performance number which assumes that you reinvest all the payments immediately (which doesn't happen), and their assumption on default rates is unrealistically low. Even if that default rate was realistic they also call a loan "late" past the point when it really should be called "in default", which means that they can further inflate the returns.
Your calculation is less misleading than LC & Prosper. However it's also unrealized returns of an illiquid asset, because if you tried to sell your loans then you'll almost certainly get less than $1575 for the value of your account... minus the secondary market's transaction fees.
The real question is whether you're getting a 5% return on a loan that's "5% risky", or whether you're getting only a 5% return on a loan that's "15% risky". You won't know until the term of the loan ends and the payback is finished. Even then you won't know whether you were a brilliant investor or just freakin' lucky unless you have a large number of loans... "large" as in "several thousand loans of at least $25/loan" and probably at least $100K for the larger categories of loans.
The companies are not adequately disclosing their operating risks or the risks of the loans they're offering. It works great... until it doesn't.