Author Topic: how much is too much p2p  (Read 5826 times)

starguru

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how much is too much p2p
« on: November 02, 2013, 03:52:57 PM »
I currently max out 401k.  I have cash left over frequently and shunt it to P2P lending.  I have heard it said that one should never have more than 4% of ones net worth in any one investment.  Does that apply to P2P (or ever)?

I kind of think that each individual P2P note is one investment.  So as long as I spread my P2P out among a diverse bunch of notes, I should be fine right?

Right now my P2P lending is only about 2% of my entire portfolio.  But I am thinking of building it up because P2P lending appears to offer consistent returns that are less volatile than markets.

My alternative is to put my leftover in personal investment accounts and just buy index funds. 




brewer12345

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Re: how much is too much p2p
« Reply #1 on: November 02, 2013, 06:23:38 PM »
I would keep this mumbo jumbo to 5% of your portfolio or less.  It has a vanishingly short track record with some pretty big bumps in the road already.

More generally, I would go up to 10% in a single name when I was in accumulation mode.  As I slouch toward the exit (FIRE) I have been limiting myself to 7% or less and even when I get up there I tend to get uncomfortable.  You have to have REAL conviction to go with a 10% position.

Honest Abe

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Re: how much is too much p2p
« Reply #2 on: November 02, 2013, 06:26:02 PM »
I think you should treat your notes in totality as an asset class, not treat each note individually.

I'm a Prosper investor, and have been happy with my returns. However the unfavorable tax-treatment and lack of liquidity of purchased notes should make someone think hard about going heavy into it. Not saying it's bad, but it's definitely not for everyone.

Cyrano

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Re: how much is too much p2p
« Reply #3 on: November 02, 2013, 06:56:58 PM »
If Lending Club or Prosper become insolvent, all of the notes that platform has issued will stop performing.  Because of this risk, count all the notes from one platform together when deciding whether you are too concentrated.

cats

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Re: how much is too much p2p
« Reply #4 on: November 02, 2013, 07:21:12 PM »
I would definitely consider all Lending Club/Prosper accounts as a single investment.  As others have mentioned, there are certain risks that apply to all the loans uniformly (i.e., if either becomes insolvent).  My personal feeling is also that since P2P is still relatively new, there is still probably some regulatory "catch-up" coming with these investments.  It may be good for investors, but it may also put a damper on returns.  Basically, I just don't feel the investment vehicle has a sufficiently proven track record to be comfortable with a large investment.

starguru

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Re: how much is too much p2p
« Reply #5 on: November 02, 2013, 07:51:02 PM »
Hmm I appreciate all the replies.  Seems like everyone is in agreement not to go too crazy.  I was wondering if all the notes could fail for some structural reason.  What would it take for a platform to stop working?  Also, what happens in that scenario to all the notes?  After all, the borrower still has his/her cash, do they simply stop owing on their loans?

So, then I guess the answer to the question about what to do with surplus is personal investment accounts and index funds?

arebelspy

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Re: how much is too much p2p
« Reply #6 on: November 03, 2013, 12:31:30 AM »
I was wondering if all the notes could fail for some structural reason.  What would it take for a platform to stop working?  Also, what happens in that scenario to all the notes?  After all, the borrower still has his/her cash, do they simply stop owing on their loans?

If the company goes BK I believe there are plans for a 3rd party administrator to step in (I know this is the case with Prosper, I believe it is the same with LC).  You will still get your payments.  However, since they are not set up to do this, they will not be efficient at doing so and will, of course, be charging fees for their costs.

Meaning your return will be much, much lower, perhaps even negative.  But at that point you'll be happy to get even some of the money back.

So, then I guess the answer to the question about what to do with surplus is personal investment accounts and index funds?

That depends. What's your AA and what does your IPS say about it?
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starguru

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Re: how much is too much p2p
« Reply #7 on: November 03, 2013, 06:53:44 AM »

Quote
That depends. What's your AA and what does your IPS say about it?

I'm 36, so I believe I am in aggressive mode for now.  I have 2 advisors who each use different strategies, one is based on SP500 funds and the other is more of a total market approach.  The former is obviously killing it this year, the latter is doing ok but not stellar.  Again, one of the reasons I like P2P is that the returns seem so consistent with risk spread out among the notes, unless the platform itself fails. 

I think going forward I want to tone down my contributions on those advisors and see how I can do by myself (and with this forum).  2014 is going to be exciting since Ill start receiving some employee purchase program stocks, as well as RSU distributions, so Ill have a lot of capital to play with, assuming I just sell the stock, which is what I am planning to do. 

arebelspy

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Re: how much is too much p2p
« Reply #8 on: November 03, 2013, 07:58:01 AM »
I'm 36, so I believe I am in aggressive mode for now.

I'd skip P2P then and go with something that has high returns (and corresponding risk).  P2P's risk isn't compensated by its returns, IMO, and having capped returns can really hurt you.  Think of the few years the stock market earns 30%, and you're sitting with 1/3 of that return, maybe.  Then that effect compounds. 

But that's my opinion on it, if your AA includes P2P because you have different beliefs about the platform, knock yourself out.  :)
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Nords

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Re: how much is too much p2p
« Reply #9 on: November 03, 2013, 09:41:11 AM »
Right now my P2P lending is only about 2% of my entire portfolio.  But I am thinking of building it up because P2P lending appears to offer consistent returns that are less volatile than markets.
My alternative is to put my leftover in personal investment accounts and just buy index funds.
As other posters have hinted, you're asking your questions backwards.

The first thing to work on is your asset allocation.  Decide what goals you're saving for, then what assets you want to invest in for those goals, and finally what percentage of your portfolio you want in those assets.  The Bogleheads Wiki has it down to a process:  http://www.bogleheads.org/wiki/Main_Page

Then you can follow the advice of other posters to keep P2P at 10% or less of your asset allocation... assuming you're willing to give your money away to non-collateralized loans for three years (or longer).

Again, one of the reasons I like P2P is that the returns seem so consistent with risk spread out among the notes, unless the platform itself fails. 
P2P lending is too new to have a performance record.  Even the returns are unrealistically high because they don't reflect enough repayment and reinvestment.  Attempting to draw conclusions about the risk of a P2P portfolio, let alone individual borrowers, is just deluding yourself. 

The biggest issue is that nobody knows what's going to happen to the loans during the next recession.  If borrowers have a choice among paying their mortgage, their utility bills, and their P2P loans... default rates are going to skyrocket.  Even credit-card issuers have a higher collection rate on delinquent balances than P2P companies.

Both Prosper and LC have third-party companies standing by in case they end up filing for bankruptcy, although nobody knows how well the turnover is going to go.  (Personally I think Prosper is in better financial/management shape now than LC, but that's like deciding which surfboard is better for 50-foot waves.  Why are you paddling out in the first place?!?)  Both companies actually have a financial motive to allow the loans to go delinquent, because they get to keep more in fees & penalties for bringing delinquent loans current.  Both companies also have an incentive to "approve" as many borrowers as quickly as they can and let the suckers lenders worry about whether the loans will repay.  I've heard that LC has finally expanded their payroll to process loan applications more quickly, but I'm skeptical that corners will remain uncut.

You want consistent returns with diversified risk?  We call that a "bond index fund" or, for even lower risk, a "CD".  They even have real performance histories...

You can read plenty of cheery consensus on P2P lending.  Here are some contrarian perspectives:
http://www.hullfinancialplanning.com/should-i-invest-in-lendingclub-or-prosper/
http://financialmentor.com/investment-advice/investment-due-diligence/peer-to-peer-lending-review/9777
http://the-military-guide.com/2013/06/06/more-problems-with-peer-to-peer-lending/

Oh, about your financial advisors?
http://www.hullfinancialplanning.com/just-what-does-that-money-management-fee-cost-you/

stevewisc

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Re: how much is too much p2p
« Reply #10 on: November 03, 2013, 09:51:19 AM »
You comment about one planner doing well this year and the other just OK captures asset class luck perfectly.  I have yet to be impressed with any of the 20+ investment advisors I've talked/worked with.  I think the return data suggest treating the market like an almost efficient market seems to be the most logical.  Then the manger fees are gone and you still get the asset class good years.

Just my 2

starguru

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Re: how much is too much p2p
« Reply #11 on: November 03, 2013, 10:39:20 AM »
Quote
As other posters have hinted, you're asking your questions backwards.

The first thing to work on is your asset allocation.  Decide what goals you're saving for, then what assets you want to invest in for those goals, and finally what percentage of your portfolio you want in those assets.  The Bogleheads Wiki has it down to a process:  http://www.bogleheads.org/wiki/Main_Page

Then you can follow the advice of other posters to keep P2P at 10% or less of your asset allocation... assuming you're willing to give your money away to non-collateralized loans for three years (or longer).


This really gets at the heart of it; so let's change the nature of this thread.

I'm 36.  My short term goal is to have a million in investment accounts by 40 (well, end of 2017).  Investment accounts can be various retirement accounts, personal investing accounts, P2P, and checking savings accounts--basically everything but not including my house.  I started this goal when I was 32, with about 100k in the bank.  Now I'm 36 and halfway there.  Once I get my million Ill set a new goal.  One thing I can say about my over all goals is that (at least right now) I want the FI part of FIRE, but not necessarily the RE.  I like what I do (software), barely consider it work, so no need to retire.

So, where do I find myself now.  When I started working on this goal my mother suggested using her financial advisers, which I did, because what do I know?  Right now I don't care so much if I continue using them going forward; one of the biggest questions is do I really want to pay a 1% fee every year if Ill can do the same with index funds.   

What I know is regardless of the advisers question, I have a modest amount to play with now, and next year (and the year after, and the year after) will be receiving a whole lot of stock, which I plan to sell and put to work.  The question is, what do I do with this cash?  I don't know what asset classes to use; I don't know anything about this really, which is why I am on this forum.  Right now bonds and CDs don't seem attractive, since rates are so low.  The stock market seems saturated, plus the money printing is going to end which will pull the markets down, so I don't know how attractive that is either.  So what do I do?

« Last Edit: November 03, 2013, 10:41:39 AM by hvgotcodes »

arebelspy

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Re: how much is too much p2p
« Reply #12 on: November 03, 2013, 05:24:02 PM »
I suggest reading JLCollin's Stock Series: http://jlcollinsnh.com/stock-series/
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.

chasesfish

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Re: how much is too much p2p
« Reply #13 on: November 03, 2013, 07:05:29 PM »
I would keep this mumbo jumbo to 5% of your portfolio or less.  It has a vanishingly short track record with some pretty big bumps in the road already.

More generally, I would go up to 10% in a single name when I was in accumulation mode.  As I slouch toward the exit (FIRE) I have been limiting myself to 7% or less and even when I get up there I tend to get uncomfortable.  You have to have REAL conviction to go with a 10% position.


+1 here.  I'm winding down my P2P account, which will take a couple years because I'm just letting it pay out.  The returns aren't as good now as two years ago.

imbros

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Re: how much is too much p2p
« Reply #14 on: November 04, 2013, 02:59:35 PM »
I have been involved in P2P investment for almost 5 years and I agree with the previous poster.


starguru

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Re: how much is too much p2p
« Reply #15 on: November 06, 2013, 06:41:40 AM »
Ok, you all have convinced me to not go crazy on this.  current plan is to keep my asset allocation at 2%.  I will reinvest proceeds as they come in but won't be making any significant contributions.  Will hit up low cost index funds with my excess cash.