Author Topic: Advantage of Stocks over Peer to Peer Lending?  (Read 3302 times)

FIstateofmind

  • 5 O'Clock Shadow
  • *
  • Posts: 87
Advantage of Stocks over Peer to Peer Lending?
« on: June 30, 2016, 07:44:51 PM »
I'm wondering what the advantage of stocks over Peer to Peer Lending are.

With a site like Prosper, I'm earning a solid 9%, while the sotck market fluctuates. Of course, Prosper isn't 100% stable, but still.

Is there more potential for growth with stocks? Even with market variances is it more stable? Tax advantages?

Thanks all!

slowsynapse

  • Stubble
  • **
  • Posts: 101
  • Age: 47
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #1 on: June 30, 2016, 07:59:08 PM »
I  think one tax advantage would be capital gains treatment on stocks over interest being ordinary income.

Slee_stack

  • Pencil Stache
  • ****
  • Posts: 853
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #2 on: July 01, 2016, 09:05:19 AM »
Dividend paying stocks would also tax at regular income rate.

I have P2P investments and just view them as a different investment class for the purposes of diversification.

I'm shocked you make 9%.  That's impressive.  I've seen my return dump year over year on P2P over the last 5 years or so.  I started in the 8.5% range and am now down to 6.7% or so.

I did just begin shifting over to PeerStreet type P2P.

chesebert

  • Pencil Stache
  • ****
  • Posts: 749
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #3 on: July 01, 2016, 09:10:54 AM »
Enjoy it while it lasts. 9% yield is squarely in the super junky bonds territory. I would not want to own any myself, but to each his own. I still remember folks protesting outside the big banks during financial crisis crying they lost all their savings to this thing called mini-bonds... Your investment is probavly more risky than that.

Pooplips

  • Bristles
  • ***
  • Posts: 459
  • Age: 33
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #4 on: July 01, 2016, 09:13:38 AM »
Most stocks are back by tangible assests that can be evaluated as an income generator. P2P is an unsecure loan to some guy you never met.

Slee_stack

  • Pencil Stache
  • ****
  • Posts: 853
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #5 on: July 01, 2016, 09:18:33 AM »
Indeed, most P2P is not collateralized.  I also feel that the big P2P houses seriously underestimated their default rates.  My own ever dwindling returns tend to support this.


zz_marcello

  • 5 O'Clock Shadow
  • *
  • Posts: 53
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #6 on: July 01, 2016, 09:23:01 AM »
The main advantage of the the stock market over P2P lending is that the stock market as a whole cannot go bankrupt, but your P2P platform can.
When you buy loans from Prosper, (or LC) you are buying an obligation from Prosper (and not directly giving a loan to another individual)
If Prosper goes bankrupt its likely that you will lose part of your investment.

With that said I have ~10% of my networth with Lending Club and with an optimized system Im still generating close to 10% yield.
I will not increase my investment to more than 10% net worth because of the default risk of Lending Club.
In some areas of the stock market you currently can achieve comparable yields.
There are high yield bond ETF's like HYLD which currently yield ~9%.
Another example are US Health Care REITS which currently have a low valuation.
Omega Healthcare (OHI) for example currently distributes a yield of 7.1% with a distribution rate of only ~75% of FFO (funds from operation).
Which means you will get 7% dividends+~2,5% appreciation from the other 25% of FFO plus covered inflation (because its equity and not debt (like Prosper)
So estimated total return of OHI is ~11% gross.

Single stocks (same like P2P Lending) are always having a small default risk.
As long as you diversify your investments enough you will be fine.
Just never put more than for example 10% in a single investment.
(An Index ETF is obviously something different because its based on multiple businesses)
« Last Edit: July 01, 2016, 09:31:16 AM by zz_marcello »

Slee_stack

  • Pencil Stache
  • ****
  • Posts: 853
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #7 on: July 01, 2016, 10:04:29 AM »
There are contingencies in place for LC/Prosper should either company fail altogether, so a loss of 100% of your remaining investment is unlikely.  No doubt, some amount would be lost though.

Regardless, the points made by zz are good ones and I tend to follow a similar line of thinking.  (My P2P bucket is about 8% or so of my investments)


beltim

  • Magnum Stache
  • ******
  • Posts: 2825
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #8 on: July 01, 2016, 10:17:42 AM »
Single stocks (same like P2P Lending) are always having a small default risk.
As long as you diversify your investments enough you will be fine.

The default rate of loans issued in 2007 was almost 15% and for 2008 the default rate was 12 percent.  This is not a "small" default risk.  Given that they've loosened their credit requirements since then, you can make a case for higher default rates the next time a recession happens.

acroy

  • Handlebar Stache
  • *****
  • Posts: 1702
  • Age: 41
  • Location: Dallas TX
    • SWAMI
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #9 on: July 01, 2016, 10:23:49 AM »
Most stocks are back by tangible assests that can be evaluated as an income generator. P2P is an unsecure loan to some guy you never met.
^^ this
It's also in it's infancy and there are some structural risks - too much money chasing too few debts.

doggyfizzle

  • Bristles
  • ***
  • Posts: 353
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #10 on: July 01, 2016, 10:46:41 AM »
Someone above mentioned the tax-advantaged treatment of capital gains (and dividends) from common stocks vs. interest on loans from Prosper.  I'd also throw out the highly illquid nature of P2P loans and the major lack of a secondary market for loan sales should you desire to exit your investment early are disadvantages of the P2P loan platform.  If you're looking for "bond-like" returns, just buy some AT&T or Verizon stock and hold it for a while.  You'll get a 4-5% starting dividend yield, and can probably count on 2-3% capital appreciation each year at minimum (roughly in line with whatever % each company raises their dividend), giving you a bit better TR than what you're getting through P2P once you factor in taxes.

slowsynapse

  • Stubble
  • **
  • Posts: 101
  • Age: 47
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #11 on: July 01, 2016, 11:12:37 AM »
Dividend paying stocks would also tax at regular income rate.

I have P2P investments and just view them as a different investment class for the purposes of diversification.




Aren't there qualified stock and mutual fund dividends that you only pay your capital gain rate on as long as you hold them for a set of rules based on the 121 day holding period?  I know that was set to expire in 2013 when originally passed, but I thought it continued today.  Please don't construe this as anti peer to peer lending.  I think there is a place for p2p in the portfolio for investors.

BigHaus89

  • Stubble
  • **
  • Posts: 210
  • Age: 30
  • Location: NW
  • Ride the Spiral to the End
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #12 on: July 01, 2016, 11:21:53 AM »
There is more potential growth and liquidity from stocks based on people I know that invest P2P. P2P lending doesn't seem like something one could do for 20+ years of investment horizon.

doggyfizzle

  • Bristles
  • ***
  • Posts: 353
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #13 on: July 01, 2016, 01:51:30 PM »
Aren't there qualified stock and mutual fund dividends that you only pay your capital gain rate on as long as you hold them for a set of rules based on the 121 day holding period?  I know that was set to expire in 2013 when originally passed, but I thought it continued today.  Please don't construe this as anti peer to peer lending.  I think there is a place for p2p in the portfolio for investors.

Yes, most dividends from common stock are QDI-eligible, meaning they are taxed at your 15% or 20% capital gains rate, not at your ordinary income rate.  Distributions from REIT or MLP units and bonds (or bond funds not holding AMT-free or Non-taxable municipal bonds) are taxed at your ordinary rate.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27792
  • Age: -999
  • Location: Traveling the World
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #14 on: July 02, 2016, 06:24:11 AM »
The advantage is that your risk-adjusted return is much higher so you will end up with way more money investing in equities than P2P loans.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

FIstateofmind

  • 5 O'Clock Shadow
  • *
  • Posts: 87
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #15 on: July 02, 2016, 03:36:22 PM »
Thanks guys! I was a bit confused because of Pete's very positive posts about P2P. Time to throw everything into VTSAX! ;D

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27792
  • Age: -999
  • Location: Traveling the World
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #16 on: July 02, 2016, 04:56:54 PM »
Thanks guys! I was a bit confused because of Pete's very positive posts about P2P. Time to throw everything into VTSAX! ;D

The vast, vast bulk of his money is in stocks. 

He gets paid to endorse LendingClub (and things like Betterment).  He may still think they're good, as well, but there is at least a little bias there.  And, of course, he's human, so he's not infallible.  Listen to his ideas, but critically think about them too.  But if you look at where the bulk of his money is invested, it's clear what he actually thinks is the best place for investments.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

FIstateofmind

  • 5 O'Clock Shadow
  • *
  • Posts: 87
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #17 on: July 03, 2016, 02:30:45 AM »
Thanks guys! I was a bit confused because of Pete's very positive posts about P2P. Time to throw everything into VTSAX! ;D

The vast, vast bulk of his money is in stocks. 

He gets paid to endorse LendingClub (and things like Betterment).  He may still think they're good, as well, but there is at least a little bias there.  And, of course, he's human, so he's not infallible.  Listen to his ideas, but critically think about them too.  But if you look at where the bulk of his money is invested, it's clear what he actually thinks is the best place for investments.  :)

Thanks! I realized this as well. I only have 10% of my portfolio in propser, so it's not too bad :) glad to have realized!

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3038
  • Age: 37
  • Location: Texas
    • Years in the making, I created a journal!
Re: Advantage of Stocks over Peer to Peer Lending?
« Reply #18 on: July 03, 2016, 06:15:15 AM »
I have a small lending club account.  It was great when I could earn 9-10%, but now I'm perpetually stuck at 7%.   I can get 3% or so out of equity with better tax treatment, nice dividend increases each year, and underlying increases in the asset prices.  Its also more liquid with lower transaction costs