Would you invest some of your retirement money in P2P Lending?

[Petunia 100]

Well, would you?  Why, or why not?

[Cyrano]

Yes, but no more than 2% of net worth through any one platform. As of yet there's not a readily available way to hedge the risk of Lending Club itself becoming insolvent.

[aclarridge]

Yes, but no more than 2% of net worth through any one platform. As of yet there's not a readily available way to hedge the risk of Lending Club itself becoming insolvent.

Agree with this, but even if that risk could be mitigated, I still wouldn't invest more than say 5-10%. It's high yield and that's fun while it lasts, until a good recession and then it would probably get slaughtered.

Although I'm in Canada and there's no viable way to get involved in it here as far as I know.

[fiveoclockshadow]

Full disclosure: I live in a state where this isn't an option anyway.

I really don't think it is worth it.  Having read about it pretty extensively it has gone through a few phases:

- Platforms/companies are small which provides potential opportunity due to market inefficiency but also risk.  A few platforms completely blew up, people lost lots of money, lawsuits followed and some "rebooted" with new platforms.  So way too risky in this phase and no reasonable way to diversify across many platforms.

- One or two reliable platforms and still market inefficiency.  An individual investor can harvest some apparently under-priced debt.  This takes effort and tools to do though, so unless you have either a huge nest egg or are insane enough to allocate a large fraction of your nest egg to P2P you run the risk of spending more time picking loans than is worth real return.  But in this phase it appears there might have been a point to doing it.

- Institutional investors enter the platforms.  This is the end of any reasonable return, the market is now efficient with the massive arbitrage powers of the institutions at work.  This is compounded by the fact that the platforms don't underwrite enough loans quickly enough.  So now there are way too many investors chasing too few loans and there is a risk of overpricing of debt.  This is where the bigger platforms now sit.

It seems that these same phases exist within a market as new platforms appear (e.g. new platforms to consumer debt) or as new markets open (e.g. student loans).  It just doesn't seem very attractive as far as a risk/reward/effort trade off.

Lastly, there is a huge risky behavioral error backing up a lot of this.  One of the primary ways to lose lots of money - chasing yield.  Chasing yield usually burns investors (e.g. junk bonds, more risky sovereign debt) and there is a big risk that P2P lenders are taking on more risk than they think and not getting adequate reward for that risk in much the same way.  When risk free returns are as low as they are now pricing errors from chasing yield become common place.  Even huge institutional investors make this error (e.g. see pricing of Greek debt compared to German debt prior to 2010).

tl;dr - It takes effort, more and more effort as time goes on, with more lenders and than borrowers right now pricing is probably out of whack and finally it is unlikely an individual will allocate enough dollars to the P2P asset class to be worth the effort in selection.

[Petunia 100]

Thanks for the feedback. ;)

I was seriously considering it, until I read that all notes would become worthless in the event the trading platform company declared bankruptcy.   That gave me pause.

[Villanelle]

I have.  It's <1% of our net worth, so it's really just a little experiment, more than anything. 

[seattlecyclone]

Yeah, I agree with fiveoclockshadow. Sites like Lending Club may have provided above-average returns in the early days before the big guys got into the market, but from what I've heard most of the loans that are likely to be profitable are now snapped up by computers within seconds of going live on the site. There are still plenty of worse places to put your money, but there are better ones too.

[nawhite]

No.

I see p2p lending giving an investor 2 options.

A. You have a definitive investing mantra for picking notes and you stick to it under all circumstances.
Pro: If you chose well, you get a decently risky return around 12% or less (looking out 3 years)
Con: You have to look for new notes ALL THE TIME and in cases where there aren't enough notes that fit your criteria, you either loosen your standards or have un-invested money sitting in the system. You also tie your money in the system for 3-5 years with limited options to cash out.

B. You use their auto investing tools. This is likely the only option if you have 100's of notes.
Pro: you don't have to look at it every day
Con: you get a very risky return around 10%. And, you still tie your money up for 3-5 years with limited options to cash out.

For a risky 10-12% return, I have better options that don't involve me checking a website every day just to keep my money invested.

[pattertall]

I do have an account at Lending Club that is < 2% of net worth.  I'd echo what others have said that it does take a little bit of time to purchase new notes, and I would not feel comfortable having more than 5% or so of my net worth in such an account.

All of my other investing is very hands-off (index funds), so I view it as a fun way to invest a bit of "play money".  After setting up my filters, logging in every once in a while at one of the times new notes are added (6am, 10am, 2pm EST) makes it very easy to find enough notes that meet my criteria and it takes less than 5 minutes a week and I find it kind of fun.  Almost all notes that meet my filters are snapped up fairly quickly, so logging in at any other time of day yields nothing.

I've heard that the tax consequences can also be annoying to deal with, but I am using a portion of my Roth IRA and therefore don't have to worry about it since it is not a taxable account.

On balance, I'd agree that it is probably not worth it unless you enjoy looking at the stats and playing around with the account for a few minutes every week.  Even then, I'd be cautious not to over-invest.

[Earthy]

I am living in Sweden, but have been using TrustBuddy for the past 3 months, and it seems to be a bit different than what other P2P sites are like. You do not have to search for opportunities at all, they take care of all the matching and lending for you. They have recently launched an international site which I think now allows North Americans to join in, it's at http://www.tbdy.com.

[mpbaker22]

Yes, but no more than 2% of net worth through any one platform. As of yet there's not a readily available way to hedge the risk of Lending Club itself becoming insolvent.

Agree with this, but even if that risk could be mitigated, I still wouldn't invest more than say 5-10%. It's high yield and that's fun while it lasts, until a good recession and then it would probably get slaughtered.

Although I'm in Canada and there's no viable way to get involved in it here as far as I know.

They had solid returns through the last (worst in 70 years) recession.  I think the biggest threat is lendingclub selling all the good loans before they hit the LC market.

[imbros]

I have been an investor in Lending Club for almost 5 years now and I think I had nearly 10% of my NW invested in Lending Club loans at some point a while ago.

I think Lending Club has evolved over time and recenntly issued loans carry more risk. I  had only one defaulted loan in my early investments, but I had 5 defaults amoung the notes I bought within the past one year. My investment strategy and parameters did not change since I have started and I have been getting decent returns, ut I am slowly moving funds from LC to Vanguard nowadays.