Author Topic: LendingClub for a FI beginner?  (Read 2149 times)

mbk

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LendingClub for a FI beginner?
« on: May 31, 2013, 04:52:23 PM »
Few details before the question: After a long hiatus from job market due to graduate studies, I started working couple of years ago. The only retirement money I have is the $12k in my 401a+403b.  My 403b have vanguard funds + other equally low expense funds available. I am in my early 30's.
Question: Is it sensible to start an IRA account with LendingClub (LC) and fund it in place of my 403b plan with respect to diversification and rate of returns? If so, up to what ratio (LC IRA money to total retirement money) is prudent. Currently $700/month goes to 401a+403b. The LC IRA money will be in addition to that.

matchewed

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Re: LendingClub for a FI beginner?
« Reply #1 on: May 31, 2013, 05:04:40 PM »
Why do you want a Lending Club IRA? What do you see as the positives? What do you see as the negatives? Are you chasing yield? Do you want to help others and therefore are attracted to lending?

See this article - http://www.longtermreturns.com/2012/07/peer-to-peer-lending.html It has a great rundown on this subject.

I know MMM is a fan but MMM is not just starting out.
http://www.mrmoneymustache.com/2012/09/24/the-lending-club-experiment/
http://www.mrmoneymustache.com/2013/02/03/the-lending-club-experiment-four-months-later/
If I were starting out I'd stick with index fund investing to build a foundation. It has risk but is buoyed by the market itself. Once you have a solid foundation and you feel like you can take some larger risks I think peer-to-peer is fine.

Joet

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Re: LendingClub for a FI beginner?
« Reply #2 on: May 31, 2013, 05:15:28 PM »
I am in the process of completely re-jiggering my finances around lending club, goal is to have 1/3 of my fixed income portion in Lending club [10% of total portfolio]. My global AA is a 70/30 bogle-ish indexer [70% equities]


so with only using relative % of portfolio size this is what I'm doing:

Taxable: Lending club account is 2.5% of porfolio
His Roth: Lending club account is 5% of portfolio [and ~50% of his Roth]
Her Roth: Lending club account is 2.5% of portfolio [and ~40% of her Roth]

the rest of my fixed income are in Ibonds in taxable and in his/her 401ks in the typical agg/total bond intermed indexes

I know Taxable lending club isnt the best in the world, but I've been playing with it for a month or so now and I see myself using it to simply park some cash and only invest in 36-month notes [with a backtested selection criteria for 10% APY or so, no CA notes, etc]. It really wont be throwing away much in dividends [4 figures] so not much of an effect. I DO like the psychological effect of growing the balance there steadily as a parking-garage for other investments/expenses though with a decent yield. I suppose you could call this yield chasing. This is absolutely NOT at the expense of large foreign index funds in taxable either.

I also managed to connive the 'signup bonus' for 2 seperate SS ID's [his/her] to get dual $300 for $10k new account signups [that are still active]. Too bad they turned off paypal funding lol credit card rewards. One account I funded with a $5k CC payment [$100 @ the 2% cash reward rate]. Heh double dipping. So total gain so far is $300+ $300+ $100 and ~1/3 of my fixed income is set to grow at around ~10%. The other 2/3 are probably going to head neg here [total bond indexes] and the Ibonds track inflation. Weeee.
« Last Edit: May 31, 2013, 05:17:31 PM by Joet »

irastache

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Re: LendingClub for a FI beginner?
« Reply #3 on: May 31, 2013, 05:21:44 PM »
I agree with matchewed. Lending Club is a complicated investment and tough for a new investor to evaluate. I suggest matchewed advice to first build a diverse index based foundation.

Make sure you understand asset allocation and the risks for each kind of asset. To me, Lending Club is selling "high yield" or "junk" bonds. Junk may be too strong a word, but consider the customer who might need to pay the rates you hope to get at Lending Club. There is for sure a place in your portfolio for this kind of bond (*) but it comes after you have built a base.

(*) My personal opinion is bonds are not for taking risks because you are not paid well for taking the risk. It is hard to avoid concentration risk at Lending Club because individual defaults hurt more than in a bond fund and there is a real risk of defaults. Your gain is limited to the set interest rate. This is a serious issue to consider for the risk of default. Stocks are also very risky but you are rewarded with a good chance of gains.

mbk

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Re: LendingClub for a FI beginner?
« Reply #4 on: May 31, 2013, 05:26:24 PM »
Why do you want a Lending Club IRA? What do you see as the positives? What do you see as the negatives? Are you chasing yield? Do you want to help others and therefore are attracted to lending?

See this article - http://www.longtermreturns.com/2012/07/peer-to-peer-lending.html It has a great rundown on this subject.

I know MMM is a fan but MMM is not just starting out.
http://www.mrmoneymustache.com/2012/09/24/the-lending-club-experiment/
http://www.mrmoneymustache.com/2013/02/03/the-lending-club-experiment-four-months-later/
If I were starting out I'd stick with index fund investing to build a foundation. It has risk but is buoyed by the market itself. Once you have a solid foundation and you feel like you can take some larger risks I think peer-to-peer is fine.

Thanks for the link. Thats a great read. To your first 2 questions, I have no definite answers. Thats why I posted the question. Yes to 3rd question and no to your last one. My mindset is more like the question in the link you posted. 

mbk

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Re: LendingClub for a FI beginner?
« Reply #5 on: May 31, 2013, 05:44:31 PM »
I agree with matchewed. Lending Club is a complicated investment and tough for a new investor to evaluate. I suggest matchewed advice to first build a diverse index based foundation.

Make sure you understand asset allocation and the risks for each kind of asset. To me, Lending Club is selling "high yield" or "junk" bonds. Junk may be too strong a word, but consider the customer who might need to pay the rates you hope to get at Lending Club. There is for sure a place in your portfolio for this kind of bond (*) but it comes after you have built a base.

(*) My personal opinion is bonds are not for taking risks because you are not paid well for taking the risk. It is hard to avoid concentration risk at Lending Club because individual defaults hurt more than in a bond fund and there is a real risk of defaults. Your gain is limited to the set interest rate. This is a serious issue to consider for the risk of default. Stocks are also very risky but you are rewarded with a good chance of gains.
I appreciate your comments about the gain/risk factor. Something worth learning and storing in long term memory.
On a related topic, how do I evaluate risk for index funds. What factors do I need to look into that affect the yields? How do I break down the risk into systemic risk and risk based on individual situation?
Without much analysis, I went with this asset allocation in my 403b
25.59%    VANG SM CAP IDX INST
23.74%    VANG REIT IDX INST   
20.43%    UC EQUITY FUND   
20.05%    UC INTL EQ INDEX   
10.19%    UC BOND FUND   
Obviously I am chasing yield. What are the risks present and how do I hedge against them?
Thanks,

mbk

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Re: LendingClub for a FI beginner?
« Reply #6 on: May 31, 2013, 05:57:52 PM »
I am in the process of completely re-jiggering my finances around lending club, goal is to have 1/3 of my fixed income portion in Lending club [10% of total portfolio]. My global AA is a 70/30 bogle-ish indexer [70% equities]


so with only using relative % of portfolio size this is what I'm doing:

Taxable: Lending club account is 2.5% of porfolio
His Roth: Lending club account is 5% of portfolio [and ~50% of his Roth]
Her Roth: Lending club account is 2.5% of portfolio [and ~40% of her Roth]

the rest of my fixed income are in Ibonds in taxable and in his/her 401ks in the typical agg/total bond intermed indexes

I know Taxable lending club isnt the best in the world, but I've been playing with it for a month or so now and I see myself using it to simply park some cash and only invest in 36-month notes [with a backtested selection criteria for 10% APY or so, no CA notes, etc]. It really wont be throwing away much in dividends [4 figures] so not much of an effect. I DO like the psychological effect of growing the balance there steadily as a parking-garage for other investments/expenses though with a decent yield. I suppose you could call this yield chasing. This is absolutely NOT at the expense of large foreign index funds in taxable either.

I also managed to connive the 'signup bonus' for 2 seperate SS ID's [his/her] to get dual $300 for $10k new account signups [that are still active]. Too bad they turned off paypal funding lol credit card rewards. One account I funded with a $5k CC payment [$100 @ the 2% cash reward rate]. Heh double dipping. So total gain so far is $300+ $300+ $100 and ~1/3 of my fixed income is set to grow at around ~10%. The other 2/3 are probably going to head neg here [total bond indexes] and the Ibonds track inflation. Weeee.

Great read. What is Ibond? interantional bond? I am just curious about some of your choices. Why no CA notes? And why only 36 month term notes? What makes your bearish on bonds?

Joet

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Re: LendingClub for a FI beginner?
« Reply #7 on: May 31, 2013, 07:28:16 PM »
I bonds are I-series savings bonds. They are awesome. I wouldnt say I'm 'bearish' on bonds, I'm just accepting that my returns over the next 2-3 years will probably be minimal. But I'm not getting out of bonds by any means.

the various back-testing lending club sites [nickel steamroller, lendingstats, etc] all point to one thing: CA borrowers default more than everybody else. Just dont buy/hold their notes, it will increase your return [as far as backtesting goes]. 36 month just to reduce term/risk a bit imo. Also worst case if I do have to hold to maturity for whatever reason payback is sooner.

grantmeaname

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Re: LendingClub for a FI beginner?
« Reply #8 on: June 02, 2013, 07:18:04 AM »
Question: Is it sensible to start an IRA account with LendingClub (LC) and fund it in place of my 403b plan with respect to diversification and rate of returns? If so, up to what ratio (LC IRA money to total retirement money) is prudent.
Before you move money that'll get tied up for a good period of time, you should do a bit more reading. Here are two links I like about LC: Long term returns (that's the blog name), and Nords' blog. Both make some powerful logical arguments against the concept, which you should at the very least read and consider before investing. Remember that you could always just start an IRA with Vanguard or one of its competitors...

(Mod Edit: Links fixed.)
« Last Edit: June 02, 2013, 02:22:10 PM by arebelspy »

mpbaker22

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Re: LendingClub for a FI beginner?
« Reply #9 on: June 02, 2013, 08:13:33 AM »
Lending Club has decent returns recently.  And without a default yet, I've gotten 5% return in 4.5 months.  That being said, I wouldn't recommend it as a sole retirement vehicle.  And I wouldn't assume you can do a 7% withdrawal rate instead of a 4%.  I expect as LC achieves a longer history of high returns, more people will invest, cutting the returns back down to market average, adjusted for risk.

Nords

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Re: LendingClub for a FI beginner?
« Reply #10 on: June 02, 2013, 02:10:35 PM »
... and Nords' blog. Both make some powerful logical arguments against the concept, which you should at the very least read and consider before investing. Remember that you could always just start an IRA with Vanguard or one of its competitors...
http://the-military-guide.com/2013/05/30/the-problems-with-peer-to-peer-lending/
Thanks!  I have two more posts coming out on 3 & 6 June about the borrower & lender aspects. 

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.
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Villanelle

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Re: LendingClub for a FI beginner?
« Reply #11 on: June 02, 2013, 02:22:25 PM »
If you want to do Lending Club because you want more diversification, or because you are far enough away from retirement that you are comfortable with some risk, by all means.  However, I wouldn't do it instead of traditional retirement vehicles.  If the LC IRA allows small monthly investments, perhaps you could throw $50/mo into the LC IRA and leave the rest (assuming you are investing the full IRA annual limit) in mutual funds. 

Personally I am keeping LC at less than 5% of my investments Actually, well less than 5%).  If I see amazing returns (I'm still fairly new at it so I haven't hit the period where most defaults happen), I might bump that up slightly, but for now, it will not be a major part of my plan.  But for now, it is almost like side money that is more fun/gambling money that it is something I am counting on to fund retirement. 

aj_yooper

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Re: LendingClub for a FI beginner?
« Reply #12 on: June 02, 2013, 03:55:26 PM »
I posted this on another thread, but I am sticking with it.

Am I understanding Lending Club or P2P correctly? 

Firms that do P2P (like Lending Club) have a great business model: charge a fee for the loan to the consumer upfront; collect a fee from each payment transaction; and, charge a fee on loans that go to collections.  Liabilities on bad loans go to the other person in the P2P, that is, the investor.  Unlike banks, they don't have to collect funds in CDs and checking accounts, maintain many buildings, or cover bad loans.  LC gets the consumer late or missed payment fees;LC gets a charge for debt collection.  They do have to build an internet presence and spread the word.  If this is accurate, I can see why Google would want to get in on the internet mechanics of the process.  Investors carry all of the risks, not Lending Club.  The prospectus also indicates they may do some notes themselves.  Cherry picking?  If you put in $5000 to LC, you can have 200 individual notes of $25; you are doing unsecured loans to an small, non diversified risk pool.  Not looking good to me.
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chucklesmcgee

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Re: LendingClub for a FI beginner?
« Reply #13 on: June 02, 2013, 04:04:25 PM »
P2P loans are subject to a wide ranges in returns unless you have a lot of notes. However, P2P portfolios of any reasonable size are less volatile than index funds and their value does not fluctuate nearly as much. The stock market might go up or down a percent or five in a day, you never see that fluctuation in a P2P portfolio of a decent size. While stocks move very closely to one another and respond immediately to any sort of international distress, bad news, etc, P2P borrowers are generally far more insulated.

I do think P2P loans are more riskier just because of their novelty. We aren't especially sure as to the real return rate in a number of cases because of the limited nature of the  dataset and constantly changing criteria. Maybe it turns out borrowers just don't really stick through.

Also important to consider is the difficulty in liquidating P2P loans. You can have a stock sold in a day and  the profits deposited in your checking account.  Liquidating P2P loans is somewhat trickier. I had to dig into my Prosper account to pay taxes and it took nearly 10 days AND I incurred some extra expenses.

aj_yooper

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Re: LendingClub for a FI beginner?
« Reply #14 on: June 02, 2013, 04:34:17 PM »
... and Nords' blog. Both make some powerful logical arguments against the concept, which you should at the very least read and consider before investing. Remember that you could always just start an IRA with Vanguard or one of its competitors...
http://the-military-guide.com/2013/05/30/the-problems-with-peer-to-peer-lending/

Lending Club and the others are pumping up the volume on their products.  They have their internet mechanism presence in place and they are hoping to ride their low cost production curve.  I get that for them, but how does that benefit the lender side?  Do you really want to be investing in a business that is a notch below payday loans?

Nords, you write very well and covered the topic astutely for your audience.  Thank you.

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Nords

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Re: LendingClub for a FI beginner?
« Reply #15 on: June 02, 2013, 06:01:14 PM »
Am I understanding Lending Club or P2P correctly? 

Firms that do P2P (like Lending Club) have a great business model: charge a fee for the loan to the consumer upfront; collect a fee from each payment transaction; and, charge a fee on loans that go to collections.  Liabilities on bad loans go to the other person in the P2P, that is, the investor.  Unlike banks, they don't have to collect funds in CDs and checking accounts, maintain many buildings, or cover bad loans.  LC gets the consumer late or missed payment fees;LC gets a charge for debt collection.  They do have to build an internet presence and spread the word.
That all seems correct to me too.

You'd think that Lending Club and Prosper would be printing money.  The reality is that LC can't approve the loans fast enough to keep up with the borrowers, and Prosper almost went bankrupt late last year.  Only one of these companies has had even a quarter of cash flow, and it was 4Q12.  For "just" $20M in addition to $83M already paid-in capital, Prosper's new investors were entitled to replace the entire board (including a founder) and the executives.  These are not signs of successful startups.  These are signs of startups who are discovering that they can't carry out a business model, or that they misunderstood their customer acquisition costs, or that their software does not scale as well as they'd hoped.

However, P2P portfolios of any reasonable size are less volatile than index funds and their value does not fluctuate nearly as much. The stock market might go up or down a percent or five in a day, you never see that fluctuation in a P2P portfolio of a decent size. While stocks move very closely to one another and respond immediately to any sort of international distress, bad news, etc, P2P borrowers are generally far more insulated.
Also important to consider is the difficulty in liquidating P2P loans. You can have a stock sold in a day and  the profits deposited in your checking account.  Liquidating P2P loans is somewhat trickier. I had to dig into my Prosper account to pay taxes and it took nearly 10 days AND I incurred some extra expenses.
The first part of your quote seems to be equating P2P loan volatility to liquidity, although the second part shows that they're very illiquid.

I have angel investments in companies whose share price hasn't changed in nearly two years, because that's the last time any of their shares traded hands.  Does that mean they're less volatile?  Sure.  Does it mean that I could sell them anytime in the next month for anything near the price I paid for them?  Nope.  There's no market for them.

P2P loans are not volatile because they only trade on the FOLIOfn secondary market, and the volume is very thin.  I've read many reports of lenders only being able to sell at a discount, although a few have told me they sold at par after a week or two.  That ain't liquid.

I do think P2P loans are more riskier just because of their novelty. We aren't especially sure as to the real return rate in a number of cases because of the limited nature of the dataset and constantly changing criteria. Maybe it turns out borrowers just don't really stick through.
Let's also include the fact that the P2P lending companies declare loans in default only long after the borrowers have stopped paying them.  The companies get to make up the parameters-- it's their business model-- but they're not marking them to market like a bank would.

It is not clear to me that either company accurately projects the default rates of the loans they approve.  They don't discuss their ranking software or the process of their rate selection committees.  It's not possible to tell that the interest rates they pick will adequately reward lenders for the risks they're taking.  All of this sounds like the Wall Street MBS and CDO companies who were selling "toxic waste" tranches rated as AAA securities.  At least Moody's, S&P, & Fitch have an operating history, even if they were ludicrously incorrect.  We're letting new companies rate their own loans.  Imagine if we let BofA or Goldman Sachs rate their own bonds when they sell them.

Lending Club and the others are pumping up the volume on their products.  They have their internet mechanism presence in place and they are hoping to ride their low cost production curve.  I get that for them, but how does that benefit the lender side?  Do you really want to be investing in a business that is a notch below payday loans?
Nords, you write very well and covered the topic astutely for your audience.  Thank you.
I think their costs are low because they're not spending the money they need to spend on employees to approve the borrower applications and to scale the software.  At least LC is hitting record volume, but lenders are sniping each other to get their money into loans.

Thanks-- Thursday's post will dig into the Lending Club & Prosper prospectuses and 10Ks.  Entertaining reading-- "entertaining" as in "having a rattlesnake dropped in your lap".  Just under a thousand pages of corporate accounting prose:

https://www.lendingclub.com/fileDownload.action?file=Clean_As_Filed_20130430.pdf&type=docs
http://www.prosper.com/Downloads/Legal/Prosper_Prospectus_2013-05-21.pdf

https://www.lendingclub.com/fileDownload.action?file=10-K-DEC-31-2012.pdf&type=sf10k
http://www.prosper.com/Downloads/Legal/prosper10k12312012.pdf

For those of you who've made loans through Lending Club or Prosper without reading those documents, I think it's like buying a house without reading either the sales contract or the mortgage paperwork.  Good luck with that.
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chucklesmcgee

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Re: LendingClub for a FI beginner?
« Reply #16 on: June 02, 2013, 07:13:29 PM »
The first part of your quote seems to be equating P2P loan volatility to liquidity, although the second part shows that they're very illiquid.

I have angel investments in companies whose share price hasn't changed in nearly two years, because that's the last time any of their shares traded hands.  Does that mean they're less volatile?  Sure.  Does it mean that I could sell them anytime in the next month for anything near the price I paid for them?  Nope.  There's no market for them.

P2P loans are not volatile because they only trade on the FOLIOfn secondary market, and the volume is very thin.  I've read many reports of lenders only being able to sell at a discount, although a few have told me they sold at par after a week or two.  That ain't liquid.

You're right that they aren't that liquid. I had to sell about $70k in notes to pay my taxes. It took about a week or two. A lot of loans didn't get any bids, some loans got a nice premium and others sold at a discount. Overall it was probably about a 3% discount or so. That's a bit of a caveat for investors- don't count on a P2P account to have much more liquid cash than comes in as daily payments.

I do think P2P loans are more riskier just because of their novelty. We aren't especially sure as to the real return rate in a number of cases because of the limited nature of the dataset and constantly changing criteria. Maybe it turns out borrowers just don't really stick through.
Let's also include the fact that the P2P lending companies declare loans in default only long after the borrowers have stopped paying them.  The companies get to make up the parameters-- it's their business model-- but they're not marking them to market like a bank would.
[/quote]

Yes, fair again. A lot of the data is extremely limited. Additionally, I think Prosper has been continually retooling its risk assessment process based on previous data about defaults. As Prosper gets a better and better lock on the ratings and offered interest rates, the previous anomalies, like very high return C or HR notes will likely disappear. So I wouldn't be surprised if average returns fall a percent or two in the next couple years.

mpbaker22

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Re: LendingClub for a FI beginner?
« Reply #17 on: June 02, 2013, 10:20:52 PM »
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.

Joet

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Re: LendingClub for a FI beginner?
« Reply #18 on: June 02, 2013, 11:26:39 PM »
With all due respect Nordstrom, 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.

mbk

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Re: LendingClub for a FI beginner?
« Reply #19 on: June 03, 2013, 10:51:16 AM »
Thank you every one. Its a lot of good information. Where I grew up, peer-to-peer lending within the community is very common as bank financing is not as developed as in America. It made me oblivious of the risks involved. Even though I am at the beginning of my career and can take the risk, I realized a bad outcome will not help my mindset.  Once I see some tangible assets/cash in my retirement accounts, I will look at peer-to-peer lending. At this point, I decided to stick with 403b.

aj_yooper

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Re: LendingClub for a FI beginner?
« Reply #20 on: June 03, 2013, 12:17:18 PM »
Thank you every one. Its a lot of good information. Where I grew up, peer-to-peer lending within the community is very common as bank financing is not as developed as in America. It made me oblivious of the risks involved. Even though I am at the beginning of my career and can take the risk, I realized a bad outcome will not help my mindset.  Once I see some tangible assets/cash in my retirement accounts, I will look at peer-to-peer lending. At this point, I decided to stick with 403b.

+1 for you!  Getting more independent every paycheck.
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Nords

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Re: LendingClub for a FI beginner?
« Reply #21 on: June 03, 2013, 07:25:36 PM »
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.
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Joet

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Re: LendingClub for a FI beginner?
« Reply #22 on: June 03, 2013, 09:04:27 PM »
Thanks Nords! I'm 'going in' with around 50k [slowly!] *crosses fingers

footenote

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Re: LendingClub for a FI beginner?
« Reply #23 on: June 04, 2013, 05:24:59 AM »
Nords - I enjoyed your description of prospectus decoding!

PtP industry overview from this week's Economist:

http://www.economist.com/news/finance-and-economics/21578670-peer-peer-lending-needs-new-name-end-peer-show
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aj_yooper

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Re: LendingClub for a FI beginner?
« Reply #24 on: June 04, 2013, 05:47:22 AM »
Nords - I enjoyed your description of prospectus decoding!

PtP industry overview from this week's Economist:

http://www.economist.com/news/finance-and-economics/21578670-peer-peer-lending-needs-new-name-end-peer-show

Good article on the loan shark biz.  To me institutional lenders doing the bulk of the loans really means big time cherry picking before the individual investors get to buy.  To paraphrase William Bernstein-In investing we think we are playing tennis with other individuals, but the Williams sisters are on the other end.
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NYD3030

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Re: LendingClub for a FI beginner?
« Reply #25 on: June 04, 2013, 09:47:26 AM »
You can backtest either platform and come up with criteria that would have performed very nicely, particularly on Prosper if you start at 1/1/2009 when they changed their underwriting.  Personally, I have a filter which, 1/1/09 - 5/31/12,  had 2500ish loans issued with a return of 16.50%.  I feel more confident in this because it excludes all loans under 1 year maturity, which is when the majority of defaults take place*

BUUUUT...

Past performance, future results.  These outstanding returns make me feel comfortable enough to drop 1k of fun money.  My main investments remain US equity + international equity + bonds.  I plan on investing further in P2P but I'm not betting the farm on any one thing.

*I recall reading somewhere at a great analysis I can't find right now...