As regular readers are aware, I'm gradually increasing my portfolio allocation of Peer To Peer Loans (P2P) to 5%, or about 20% of my fixed income allocation. I rolled over Roth IRA money to Lending Club this fall and have been selecting loans to invest in. The biggest downside to P2P has reared its ugly head- the time issue. I've been investing $25 per loan to maximize diversification. With the $10K I've rolled over thus far, that's 400 separate loans (plus the 50 I've got in a taxable account). So I've had to log-in frequently to select loans. Now a fair amount of loans that I select, perhaps 1/3-1/2 of them, aren't ever finalized because the person doesn't meet final approval with Lending Club, probably due to lack of income verification or something similar. So that means to get 400 notes, I might have to select 600.
Why Does This Matter?
This didn't seem like a big deal initially, I mean there are always hundreds of loans available on the platform to choose from. But the longer I do this, the more hassle it becomes. The main reason is because I'm not willing to settle for average returns. It's pretty easy to go to a site like lendstats.com and find out which loans gave better returns in the past. For example, loaning to mortgage holders, doing only 5 year loans, and ensuring a low number of credit inquiries in the last 6 months all increase returns on the notes. The problem is that every time you use one of these filters to try to increase your return, you decrease the number of loans available on the platform. This becomes a huge deal if you want to invest a lot of money, want to maximize diversification, and don't want to have to log in to the website every day for months to get a lump sum invested.
Balancing Return With Availability
I thought I'd take a look at how these two factors interact. So I took a look at all of the loans made at Lending Club from August 2009 to August 2012. It turns out there were 65,704 loans, with an average return of 7.1%. This “index return” is what I'd like to beat. I'd like to have long-term returns of 8-12%. The only way to do that is to use multiple “filters” to select the better performing loans. I went through all the filters that lendstats.com offers, especially those which can be automatically filtered on the Lending Club site. I discovered that if you only purchase lower quality 5 year notes (D-G) from mortgage holders with no inquiries in the last 6 months, with a credit score less than 678, with a credit history of at least 10 years, employed for at least 2 years, without any public records, and only from the best 22 states, that you can increase your return from 7.1% to 17.80%! That sounds fantastic! What's the catch? Well, over those 3 years, only 117 loans met all those criteria, or about 0.2% of all loans. As I write this, there are 862 loans available on the platform. 862* 0.2%= less than 2 loans at any given time. And remember that loans stay on the platform for up to 14 days before closing. So that could be as little as 3 loans PER MONTH that meet my criteria. Buying 400 loans at the rate of 3 per month will take over a decade. That's obviously not a viable strategy.
So the investor is left with a choice. He can either decrease diversification and put more money into the good loans, or he can become less selective in choosing notes (or some combination of the two.) Since I couldn't use all the filters, I wanted to know which ones increased return the most while decreasing the number of notes to invest in the least. This is what I found:
| Filter | Return | Additional Return | # Loans | % of Total | Additional Return X % Total X 1000 | Screenable |
| B-G | 7.58% | 0.48% | 49776 | 75.8% | 3.64 | Yes |
| D-G | 8.43% | 1.33% | 15587 | 23.7% | 3.16 | Yes |
| Mortgage | 7.60% | 0.50% | 29535 | 45.0% | 2.25 | Yes |
| CreditCard/Debt Cons | 7.85% | 0.75% | 34421 | 52.4% | 3.93 | Yes |
| Inquires 0-2 | 7.54% | 0.44% | 59242 | 90.2% | 3.97 | Yes |
| Inquiries 0-1 | 7.63% | 0.53% | 50070 | 76.2% | 4.04 | Yes |
| Inquiries 0 | 7.81% | 0.71% | 32074 | 48.8% | 3.47 | Yes |
| 60 month term | 7.80% | 0.70% | 16361 | 24.9% | 1.74 | Yes |
| DTI > 25% | 9.29% | 2.19% | 2833 | 4.3% | 0.94 | No |
| CS <678 | 8.50% | 1.40% | 12778 | 19.4% | 2.72 | Yes |
| CS<713 | 8.16% | 1.06% | 37895 | 57.7% | 6.11 | Yes |
| Max Loan 20-35K | 8.52% | 1.42% | 11585 | 17.6% | 2.50 | No |
| Earliest Credit > 5Y | 7.16% | 0.06% | 62848 | 95.7% | 0.57 | Yes |
| Earliest Credit >10Y | 7.27% | 0.17% | 47041 | 71.6% | 1.22 | Yes |
| Earliest Credit > 15Y | 7.68% | 0.58% | 23761 | 36.2% | 2.10 | No |
| >8 Open Credit Lines | 7.64% | 0.54% | 36697 | 55.9% | 3.02 | No |
| >15 Total Credit Lines | 7.39% | 0.29% | 46230 | 70.4% | 2.04 | No |
| Balance > $25K | 8.25% | 1.15% | 8871 | 13.5% | 1.55 | No |
| Balance > $15K | 8.10% | 1.00% | 21196 | 32.3% | 3.23 | No |
| Balance > $10K | 7.94% | 0.84% | 32986 | 50.2% | 4.22 | No |
| Balance > $5K | 7.61% | 0.51% | 48647 | 74.0% | 3.78 | No |
| Utilization > 30% | 7.64% | 0.54% | 50166 | 76.4% | 4.12 | No |
| Utilization > 40% | 7.78% | 0.68% | 44003 | 67.0% | 4.55 | No |
| Utilization > 50% | 8.00% | 0.90% | 36766 | 56.0% | 5.04 | No |
| Utilization > 60% | 8.15% | 1.05% | 28969 | 44.1% | 4.63 | No |
| Utilization > 75% | 8.12% | 1.02% | 16513 | 25.1% | 2.56 | No |
| Utilization 60-80% | 8.27% | 1.17% | 16518 | 25.1% | 2.94 | No |
| Months Since Delinquency | -7.10% | 0.0% | 0.00 | – | ||
| Income > $5000 | 7.92% | 0.82% | 33044 | 50.3% | 4.12 | No |
| Income > $6000 | 8.38% | 1.28% | 23158 | 35.2% | 4.51 | No |
| Income > $7000 | 8.77% | 1.67% | 16230 | 24.7% | 4.13 | No |
| 2 Year DQ 1-3 | 7.66% | 0.56% | 6834 | 10.4% | 0.58 | Yes |
| 2 Year DQ 4+ | 7.93% | 0.83% | 222 | 0.3% | 0.03 | Yes |
| No Public Records | -7.10% | 62821 | 95.6% | High | – | |
| Location | 8.07% | 0.97% | 28339 | 43.1% | 4.18 | Yes |
| Employed > 2Y | 7.30% | 0.20% | 52421 | 79.8% | 1.60 | Yes |
| Combo 1 | 11.37% | 4.27% | 1473 | 2.2% | 0.96 | |
| Combo 2 | 10.49% | 3.39% | 8649 | 13.2% | 4.46 | |
| Combo 3 | 12.08% | 4.98% | 2737 | 4.2% | 2.07 | |
| Combo 4 | 17.80% | 10.70% | 117 | 0.2% | 0.19 | |
| Combo 5 | 12.76% | 5.66% | 1750 | 2.7% | 1.51 | |
| Combo 6 | 12.28% | 5.18% | 3797 | 5.8% | 2.99 | |
Let me explain a little bit. Looking at the first row in the table, you see that if you just get rid of all the AA and A loans, that you increase your return from 7.1% to 7.58%, an increase of 0.48%. Unfortunately, that also eliminates nearly 25% of the loans on the platform. In an effort to relate those numbers to each other, I multiplied them together, and then multipled by 1000 to make it an easy number to work with. This gives me 3.64, which is pretty high as these filters go. The last column indicates that this process is automatable using the filters on the Lending Club site. Unfortunately, many of these filters aren't automatable on the site, so that requires more time for you to look at the loans individually and be your own filter.
Now, compare buying only B-G notes with selecting only 60 month notes. The average 60 month note returns 7.8%, an increase of 0.7% over the “index return” of 7.1%. That's a higher return than you'll get by using B-G notes. Unfortunately, that filter removes about 75% of the notes on the platform. Once you multiply the numbers together (3.64 vs 1.74), you see that you're probably better off using the B-G criteria than the 60 month loan criteria, especially when combining multiple filters together as most investors are apt to do.
By doing this with all of the possible filters about which I could find return data over this time period, I started looking into various combinations of factors. I first looked at what I had been doing- basically D to G loans, mortgage holders, 60 month loans, >5 year credit history, >$6K per month income, no public records, employed at least 2 years, credit card/debt consolidation only, and discovered why it was taking forever to invest my money. Only 2.2% of the loans on the platform met criteria! 864 loans * 2.2% = 19 loans every couple of weeks. At that rate it could take me well more than 6 months to invest $10K into $25 notes. There's an additional problem with this- that cash drag on having money sitting in the Lending Club account not earning money can be significant over long periods of time.
At that point I started playing with the filters trying to only include those with a relatively high multiple, 3.5-4 or higher. I wanted to get higher returns, but I also needed notes to invest in. I eventually settled on the combination above entitled “Combination 6.” Over the three years I studied, this combination increased returns from 7.1% to 12.28%, which is actually higher than what I was doing, which only increased returns to 11.37%. The icing on the cake is that instead of only having 2.2% of the loans on the platform meeting my criteria, now 5.8% do.
My New Criteria
So what is Combination 6? It mostly includes the filters that gave me the highest multiple of the increased return by the % of loans remaining after the filter. I just needed some type of equation that related the two items to one another. So I included the following filters:
Automatable Filters
- Grades B to G
- Purpose: Credit Card and Debt Consolidation only
- Inquiries: 0-1 only
- Credit Score: < 714
Non-automatable Filters
- Credit Card Balance: > $10K
- Credit Utilization: >50%
- Monthly Income: >$6000
When To Be Picky
When you're just reinvesting the proceeds of your notes, and thus only need to choose one or two notes, you can afford to be pretty darn picky, especially if you haven't been on the site for a couple of weeks. If you just rolled over $5K into a Roth IRA, you'll have to be less picky. So perhaps I ought to use “Combination 6” when I need a lot of notes, and add a few more filters when I don't need very many. For example, eliminating B and C grade loans from Combination 6 increases returns to 12.45%, although it decreases available loans to 3.4%.
A Moving Target
Remember, of course, that nothing is guaranteed. This is data-mining at its finest, and from a pretty limited data set to boot. For example, I found if you only lend to people in 22 states, that you can increase returns by 0.97% and only eliminate 57% of the loans. It turns out that loaning to Alaskans was far smarter than loaning to Utahns over this three year period. But there seems little rhyme or reason to the list of the good states versus the bad states. (In case you're curious, the good states were AK, AL, AR, CT, DC, DE, HI, IL, KS, LA, MA, MD, MT, NH, NY, OK, PA, RI, TX, VA, VT, and WY.) So some of my results are probably similar to the nonsensical predictions people use for the stock market, you know, the price of butter in Bangladesh or the conference of the Super Bowl winner. If you look at enough data, you'll see patterns that aren't really there.
To make matters worse, Lending Club changes their methods from time to time, which makes our limited sample of past data even less useful than it is. There are loans in the database that Lending Club wouldn't make at all now. The reason some of these filters work isn't that the notes filtered out are necessarily better credit risks, but that the yield given to you for taking that risk is higher than it should be. Basically, Lending Club penalized people too much for that low credit score, for instance. As Lending Club tweaks its model, some of those factors are bound to change.
Also keep in mind that many of these loans I'm looking at haven't yet run their course. Returns are almost surely bound to be lower than projected here since some of the loans are only 3 months old. In fact, only
New Tools
Two Other Possible SolutionsWhile I was writing this post, I was alerted to a new tool called Nickel Steamroller. Lendstats.com has been having a few bugs lately, so I tried out Nickel Steamroller. It actually has a feature called “Current Listings” which lists the loans currently available to purchase on Lending Club and assigns them an expected return based on loan length, FICO range, loan purpose, total funded amount +/- $2K, delinquencies, and inquiries (all from data-mined past loan data). Lendstats.com also hasn't been keeping up the Prosper side of its site. You can get Prosper data at Prosper-stats.com.
There are two other ways to deal with my dilemma of trading return for diversification. The first is to keep half your P2P investments at Prosper.com and half at LendingClub.com. This way you can select the highest returning notes from each. It obviously increases your portfolio complexity, but might be worth it for you. The second is to purposely decrease diversification. Is there really a significant benefit to having a thousand $25 loans instead of five hundred $50 loans? Probably not. In fact, when deploying a significant sum of money, you could put $75-100 into loans that met your strictest criteria, and then $25-50 into loans that met most of your criteria. This would likely boost returns even further as the portfolio is tilted toward the loans with the highest projected returns.
I'm obviously learning more about P2P as I go. It's fun to have an investment to tinker with where the tinkering seems to actually improve returns (unlike stock picking.) I'm perfectly happy with my returns so far at Lending Club (around 10%). But the more I can automate the process the better. Do you have any tips for making your P2P investing more automatic without sacrificing returns? Sound off below!
25 bucks per loan? Thats not diversification thats madness. At least do 100 to 200 bucks. Have a little conviction. This sounds harder than day trading and i bet you could do better with some active stock investing that would be less a hasle
Good criticism. You’re right that for the sum I intend to have invested I need to put more into each loan. I doubt there is any significant diversification benefit to having 10,000 loans instead of 200-500.
I’m not, however convinced I’d do better with stocks than these loans. I think this market is far less efficient than the stock market and active management is far more likely to yield superior results.
I think it’s a balance. Wait until you get your first $100 note default! I’ve settled on 40-50/note as it’s not as painful when a bad note defaults (had about 6% so far for 10% total return).
It’s more a variable of how much you have invested. When you have $10K invested, perhaps a $100 default hurts. I doubt it hurts nearly as much when you have $100K invested. What hurts then is spending hours looking for enough $25 notes to invest in!
Whether $25-50 per loan is madness or not is dependent on many factors, especially the amount of your total investment & your “ESCAPE STRATEGY” if loans start to look shaky. Even if you have no strategy then $25-50 is far less mad than $100-200. If you do have an escape strategy, then I can guarantee you that getting out of $25-50 loans is way easier, faster & less expensive than $100-200 loans. So let’s not be so quick to judge what is “madness” & what is not.
Disclosure:
Multiple LC accounts, investing for 3 1/2 years.
2700+ notes total (all $25 or $50)
80-85% 3 year loans
Avg loan age……approx. 1.3 yrs old
XIRR ROI……15%-16%
NAR……lowest acct. 14.4% to highest 17+%
I spend 5-7 minutes on weekdays managing each account (including Folio activity)
There probably are more buyers on Folio for $25 notes than $100 notes, but I can tell you right now that I don’t want to manage 2500+ notes. That’s way more than you can possibly need for diversification reasons.
But your experience demonstrates that this asset class can add some real value to a portfolio.
Probably? No,no, definitely way more buyers. And more importantly liquidity without needing to resort to substantial discounts……….as part of my “trading/escape” strategy. Secondly, of course 2500 is way more than you need for diversification. But you apparently didn’t read my post too carefully. I manage MULTIPLE (5) accounts across both LC & Prosper. That is 2700 notes, (not 2500) in TOTAL.
BTW, I can tell you that I wouldn’t want to go through all you apparently go through just to manage your 1 small account. 🙂
I haven’t tried to sell anything but $25 notes on Folio. I assume you have and are correct. I guess each investor has to decide how important being able to sell late notes (or get out of P2P Lending all-together) is to them vs the convenience factor.
I have 3 total P2P accounts and would prefer just one. You seem to be saying you prefer having more than one. Not sure why, although I can understand why someone might have multiple. I’ve got more accounts than I want to manage as it is between 2 401Ks, 4 Roth IRAs, a defined benefit plan, 3 529s, multiple bank/brokerage accounts, and an UGMA. I was happy to get rid of 3 ESAs over the last year or so. I have more accounts than asset classes.
I stand corrected. I didn’t realize you were dealing with 3 accts. I don’t prefer to have multiple accts. For various reasons that I don’t care to go into, it is my reality.
What I am ultimately saying is that p2p like most other things, is what you make it. You can make a 1 time decision, put all your investment in Prime & be content with a long term 5-6%. If you believe these figures are too low, ask Peter Renton & look at his Prime results. Or…………you can self manage your p2p accounts & “earn” substantially more IF (& that is a big IF) you know what you’re doing & work at it while resisting the temptation of just being lazy. I’m saying that the people who advocate large note purchases are imo just being a bit lazy & not considering that they’re compromising their exit strategy (if they even have one) & increasing their risk.
Incidentally, it may appear that my 15-16% long term returns imply that I’m taking big risks, but I’m actually not. I’m only 15-20% invested in 5 year loans & most of my 3 year loans are of the LC B-D grade. Using the same strategies I use now, if I were to go higher risk & longer term, I’d end up at 18%+ long term. No, I’m not really interested in sharing my investment strategy. 🙂
Lazy is a negative word. It may just be that the person can have a higher return on his time doing something besides logging into 5 accounts a day. A surgeon who makes $300 per hour at work would need a very large P2P account to make spending that kind of time a good idea. For example, if you had a $100K account, and by managing it intensively you could increase your return from 10% to 14%, you’re talking about an extra $4K a year. Let’s assume you’re in a Roth IRA here, so that’s $4K after tax. The surgeon may be making $200/hour after tax, so we’re looking at about 20 hours of work to make up for that $4K. Even at 7 minutes a day you’re looking at 43 hours over the course of a year. Now, if it’s only a little $10K account like my LC Roth….you see that lazy may not be the right word. It just doesn’t make sense to spend 43 hours making money at Lending Club instead of 2 hours making money at the ER. Automation becomes much more important. Instead of micromanaging loans, I could go work another 5 shifts and double the money in my Lending Club account. I’d much rather have a 10% return on $20K than a 14% return on $10K!
True…….it does matter what else we choose to do with our time & how we value that time. And yes I agree that having $10k in a p2p account & putting in a lot of time makes no sense. That is not my reality.
However I think your $300 per hour comparison is a bit silly. I’m watching soccer half the time while managing my LC accounts daily. I can only hope that you’re a bit more focused while earning $300 per hour doing your job. Besides, I have tons of free time………as you can see. Hell how much did you just earn while responding to my posts. I’m guessing you weren’t making $300 per hour then. 🙂
Great post. I want to emphasize one point you made. There are two different types of investing – putting your initial investment to work and then reinvesting the interest and payments. If you want to put your money to work quickly you need to be less picky but for reinvestments you can afford to be very picky.
I invest in only D-G rated loans and these are becoming a smaller portion of the loan mix. The available loans are reduced when you add several filters so I typically only have 1%-2% of the loans on the platform available to me. This is fine for me, I can login every three days and run my filters (which can be done in Excel or on sites like Nickel Steamroller, PeerCube or Interest Radar) and then invest. It takes less than five minutes each time and I can remain fully invested.
I completely agree Peter. Putting money to work initially can be very difficult (depending on the size of the investment) while your overall reinvestments will be significantly smaller, and “rolling” in nature. Much like you, I use excel to apply my filters to the available notes and invest in those that match. Even while putting my intial investment to work, the time requirement each time is no more than five minutes at a shot.
Definitely. I’m really picky with reinvestments but I hate seeing cash sit there for months when I’m initially deploying it. I think my next rollover will simply be a smaller sum, perhaps $2K at a time, or perhaps I’ll just go with the suggestion above to do $100-200 per loan.
One other consideration I had is to make the amount I put into each loan variable. If it meets all my criteria, perhaps invest $100 in it. If it doesn’t meet one, perhaps $50, two perhaps $25 and three skip it.
Perhaps it is time to review a wonderful book I found on your reading list, The Coffeehouse Investor? The principles seem to apply to fixed income investing as well.
Good criticism, whether you meant it or not. Investing in P2P lending definitely violates the spirit of The CoffeeHouse Investor.
“Also keep in mind that many of these loans I’m looking at haven’t yet run their course.”
The above statement is the key CAUTION for readers in finding suitable filters based on historical data. As you used loans issued between 2009 and 2012, only 2009 issued loans with 3 year term have matured. Majority of loans in your analysis are not seasoned enough. I shared your combination 6 filter as peer filter on PeerCube http://www.peercube.com. It shows Total ROI based on matured loans issued between 2007 and 2009 for your filter to be 6.89% versus 6.79% for all matured loans issued between 2007 and 2009.
I agree with your point about some filters not generating enough quantity of loans. IMO, these are primarily driven by focus by lenders on deploying their money as soon as possible to start generating some return. Lenders need to balance the need to deploy money quickly versus lending to poor quality loans that don’t meet lender criteria.
The question to ask: Is it better to invest in undesirable loans that may be more likely to default or lose some of your investment versus leaving same amount uninvested at 0% return? FYI, on average, a defaulted loan loses almost 50% of principal invested by lenders.
Another investor focus is the number of loans required in a portfolio for diversification. As lending club stats show, a portfolio of 800+ loans most likely to have positive return. But what is the upper limit when further diversification starts to result in regression to mean?
Personally, I have no interest in deploying investment quickly or diversifying beyond 500 loans. I rather invest in quality loans with manageable number of loans.
On a risk scale from 1 to 10 with 10 being penny stocks and 1 being CD’s or US Treasuries, where would you assign this lending club?
more or less risky than corporate bonds? Preferred stocks? Dividend bearing stocks?
I’ve read many of your posts on this subject and for someone so against stock picking and for index funds, i really can’t figure out why you spend a lot of time and money doing this.
I mean let’s say you are making 10%… great. Buy at what risk factor, and what kind of hourly rate?
With a stock or etf there is certainly an evaluation you have to make when purchasing it, and time you have to spend maintaining it.. but the amount of work you’re talking about doing seems much higher.
I hope to eventually get the hourly rate way down. Like Peter above, when I log on I’m spending less than 5 minutes (and usually while doing something else on the computer in the background.)
I’d put the risk up there probably beyond your typical large cap stocks. I think these loans are VERY risky. They default all the time. That’s why they have to yield 20% to give you a decent return. Perhaps 8 or 9 on your scale.
Why do it at all? Diversification. I would expect P2P loans to perform very differently from the safe fixed income in the rest of my portfolio and also very differently from the stocks in my portfolio. There isn’t a lot of data (just a few years) but returns thus far have been pretty good for anyone who takes it reasonably seriously. 10% returns are becoming harder and harder to find all the time out there.
I love my Vanguard Index funds but when the market is at what seems to be a peak, I heavily tilt my portfolio towards LC. I’ll tilt back to a US index fund when the index plummets to cheaper prices. Do you feel this way as well?
I have also begun to question the common wisdom of maximal diversification of 25$. I know my filters are far too strict right now (only 4 loans showing up), and I am still trying to hack out which filters I’m using that are nonsense. That’s the hard part.
Thus far I’ve just kept it at a strict allocation like the rest of my portfolio rather than trying to do some tactical asset allocation. I’ve tried very mild tactical asset allocation in the past and find I guess wrong as often as right.
Maybe a 6 as a guesstimate. I dont know of any hard data on this.
Most of us also have stocks. This adds another asset class.
There are several reasons I like P2P lending in addition to stocks:
*Transparency – There is much more data and transparency than in the stock market.
*Equal footing – My dollar is more or less equal to your dollar in P2P trading. With high frequency trading and insider trading, I feel that stock trading has more. . . if not outright corruption, more unequal market access between mom and pop investors and banksters.
*Competition with Big Banks. I like the idea that I can earn a strong competitive return vs banks and CC companies. If you include all the fees, I earn a negative interest rate from my mainstream bank. These are the same folks that gave themselves bonuses with our tax payer bailout money. I’m happy to vote with my dollars against the status quo system.
*Diversity I already own stocks and real estate. Bonds don’t seem to pay that much. P2P adds diversity and has a good yield.
*Im a nerd. The truth is I enjoy working with numbers and data, it keeps my mind sharp. It is important to include the cost of your time for doing things you don’t like to do. But that calculation should change for things you enjoy. I enjoy optimizing filters and working with data.
i thank wci for posting his experience. I learn from it. With that said, i dont see how this type of investing can be recommended given the lack of evidence. Its fine as an interesting hobby but its not in the same league of evidence as index funds vs active funds and there really isnt any evidence that the returns are appropriate when risk adjusted. Id venture to say that when risk is actually adjusted for that the returns are lower but that is just a guess on my part. It might be diversification in some sense. I however dont think it can be market timed such that now is a good time to do it vs other times.
I initially deposited 5K into lendingclub last summer and it took about 2 months to fully invest. I didn’t have as strict criteria as WCI but I looked for rates about 14%, no delinquencies, and I can only do it from the folio site. My results are not too hot. I’ve had about 20 out of the 200 loans in the 30-120 day late category. 7 have defaulted and 6 are still in the late category. The rest I sold off for 10 cents on the dollar. It says my return so far is 7.79% but if the final 6 loans get charged off I will be negative. Now I am a lot more picky and so far no new loans have drifted into the late category.
What is your strategy for late loans? Do you sell immediately or just hope for the best? I think selling quickly before the loans become late is probably the best but it also requires a lot more time.
So far, my 5K experiment has not been too great but it does give some of us tinkerers an outlet to try to beat the market while we watch our index funds slowly make us rich.
I hope to address the “when to sell” and “how much to sell for” questions in a future post. I’ve been able to sell my late loans prior to default thus far. In the grace period I can usually sell for close to full value, but after 16 days late I usually need to sell it for nearly 50% off and after 30 days late for around 75% off.
There’s no doubt that anyone investing in these high risk loans had better plan to have some defaults.
I really like this blog, but this seems like madness. As an attending ED doc you’d have to be better off putting the time you are spending into more clinical time (or making sure you are billing optimally) and investing the proceeds in Treasury Bills, no? And sure you might be able to get better as time goes by, but this is a tiny market and if it gets bigger it will get more efficient, so I think it will be hard to scale up
This
You’re probably right that spending more time at the hospital would be more profitable. But the point of investing is to NOT spend more time at the hospital, no?
The time requirement is IMHO the biggest downside to doing P2P Lending. There are automated options (including some funds that do all the work for you.) The other alternative, as mentioned above, is simply to make bigger loans. If you want $20K invested, you can do $200 loans and still have 100 of them. If you never wanted to manage more than 100 loans, you could invest $100K in $1000 chunks. In that respect, I think it scales fine. I think you’d run into problems if you started trying to do bigger chunks than $1000 per loan or if you wanted fewer than 100 loans in your portfolio. I’m not sure what the optimal number of loans is (where you max out the benefits of diversification), but I’m sure it’s less than the 800 loans that Lending Club advises you hold. As mentioned above, it’s not an appropriate asset class for a set-it, forget-it and move-on-with-life type of investor. Advocates say the work is minimal, but compared to a portfolio of 3 or 4 index funds? Not really. It’s probably less work than managing rental real estate though.
Treasury bills sound great, but they’re hardly an investment at 0.02-0.14%. Might as well put the money under the mattress. You’re losing the same 2-3% a year to inflation.
P.S. If we judged everything we do by hourly rate, I’d probably have to quit blogging before dumping P2PL. 🙂
@wci
if you enjoy doing the p2p lending and it’s as much a hobby then i think it’s great.
I can tell you i think you could take the same time and energy and sure get a better return with less risk and less time by joining some of us over in the income investment forums like silicon investor or morningstar and getting in on some BDC’s, Preferred stocks, REITS, etc.
My passion for that has been equal to the passion you have for the lending club except my returns are better, my time is less, and my risk is lower.
It’s not quite fun enough to be a hobby. I haven’t checked out silicon investor, but am familiar with the Morningstar forum. I already own all the publicly traded REITs, and have no interest in private REITs. My understanding of preferred stocks is that they aren’t a particularly good investment for the individual investor. I have a very limited understanding of investing in business development companies.
I’m of the school of thought that it doesn’t matter much what you do with 5-10% of your portfolio so those of us with an urge to tinker ought to limit ourselves to that percentage of our portfolio in relatively speculative investments.
I’ve been investing on LC for 3 years with a net return of over 11%. I use 2 sets of filters, with the tighter filter getting $100 investments, and looser filter getting $50. Another suggestion is to keep a spreadsheet of charged off loans and the characteristics of these loans. I’ve noticed trends in some of the charged off loans (I no longer lend on notes under 6K, or medical costs as a loan purpose), that in most cases helps me to either to avoid certain loans, or be more careful with certain types of loans.
Thanks for the great comment. I’m migrating toward a similar idea. Fewer loans using a strict filter, but more in each loan. I think I’m pretty comfortable with a minimum of 500 loans in the portfolio, which is about where I’m at now. So I’ll start increasing the amount per loan as I reinvest and rollover more money. I don’t want to go straight to $200 per loan (since most of my loans are at $25), but I’ll probably get there eventually. A 5% slice of a $2M portfolio is $100K, or 500 $200 loans.
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