Perfomance Update

At the start of every month, I"ll provide a performance update on my Prosper and Lending Club portfolios.

Prosper
My first loans with Prosper are almost 9 months old. I understand that if a note is going to default, it is common that they do so between 9 and 14 months of age. So far though, I can't complain as all notes are current.

In the past month, I've almost doubled the amount of notes that I own (from 36 to 68). I intend to slow down the pace a bit for the remainder of the year.

Lending Club
My Lending Club portfolio is still very young. So far, I'm happy with the service. In the next couple of months, I'll be putting more money into Lending Club so my investment is on par with my Prosper account.

From the second screen capture below, you can see that my performance is slightly below average. This is because I tend to invest in safer loans, not because of defaults (none so far). This may change as I hone my strategies.

I recently started with an automated plan on Prosper. More on that next month.

Happy Lending everyone!

Prosper on the Fritz

UPDATE (6.3.2011): As of this morning, my account is back to normal. All funds have been restored.



I was looking at my account this week and noticed that my account was suddenly showing a loss despite having no charge-offs or even any late notes (click the image below for a clearer view):

I tried calling Prosper on their "Lender Priority Support" line. This is a futile endeavor. No-one ever picks up, so I left a voice mail which was not returned. I also submitted a complaint to their email support. Again, nothing. Finally, I contacted someone directly at Prosper who forwarded the problem on. A couple days later, someone contacted me and explained that I'd been overcharged on a service fee  (again, click the image for a better view):

This still hasn't been resolved, but I expect it to be this week (that is what my contact told me).

I take two lessons from this:

• Lending Club beats Prosper in customer service hands down. I've always been able to get someone on the line immediately with Lending Club.
• Keep a close eye on your account. While this is probably an obscure bug, if I had a lot of money in my account or didn't check it frequently, I may never have noticed this.

I'll post an update when this is resolved.

If you follow the herd, you're probably going to step on some crap

Once in a while, I'll take a step back from the world of P2P lending and discuss something else. This is one of those times. Lately, I've been thinking about how people manage, or more commonly, mismanage their money. This week, I'll share a couple of observations.

Bailing out at the bottom
I was talking to a co-worker in March of 2009 and he told me something that blew my mind. It was so shocking that I remember it clearly to this day. He was lamenting the state of the financial markets. I asked him if he had changed his investing direction within his 401(k). He then told me that 'he had just converted all of his investments from stocks to bonds.' 

Before we go any further, take a look at the chart below. It shows the market peaking in July 2007. After that, it went into a free-fall, bottoming out in March of 2009: 

So, my co-worker rode the market all the way to the bottom. He then converted all his investments to a bond fund that paid less than 5%.
When we had that discussion back in 2009, I told him that I thought he was doing the wrong thing. I explained how I thought that the market was beaten down and he should stay the course. While he had lost a lot of money, dollar cost averaging would help him recover. He was insistent though and remains in bonds to this day. I'll also add that he was in his late 20s.

When my co-worker was at the age when he should have been most aggressive, his money was invested in a low-earning bond fund. He missed out on a huge bull run, leaving a lot of money on the table.

His behavior isn't unusual though. It's human nature to follow the crowd, even when it heads for the cliff. Those that can free themselves from the bonds of crowd thinking are often the most successful. Keep in mind this quote that has been attributed to Warren Buffett: "Try to be fearful when others are greedy and greedy when others are fearful."


I make 200,000 a year, but please give me a loan
While looking for notes on Prosper and Lending Club, I routinely see people looking for money that have likely made some horrible financial decisions. I see listings from plenty of physicians, lawyers and others who make well over $100,000 a year. Since Prosper verifies income (Lending Club verifies on some listings), I have to believe that these people are being truthful.

Why do people who have significant incomes have to take out loans to pay off credit card debt or a home improvement project? I have to believe that most of these folks are living beyond their means. Again, it fits in with the way too many of us live our lives. Buy now and worry about paying (and saving later).

50+ Notes on Prosper, Warren Buffett wisdom and other Random Thoughts

I noticed this week that I funded my 50th loan on Prosper. I also passed the $25 mark in interest earned. I am definitely still a small time lender. Want to see a true believer? Check out lender reflective-rupee who is closing in on 2,000,000 in money lent. Two million, wow!

Some random thoughts

• I started lending because I was looking for something to do as an alternative to a bank account.which mostly pay less than 1%. Had my money been in a bank account, I would have made about $2 instead of $25. Now, I can buy a half tank of fuel with my extra proceeds!
• I see P2P lending as an investment somewhere between a savings account and the stock market. Unlike a savings account, my money is tied up, but not as long as it should be with a stock investment. Warren Buffett believes that you should be willing to retain a stock for a long time and I agree with him.
• I would love to see mobile phone apps (especially Android and iOS) for Prosper and Lending Club. Wait, I'm an iPhone developer. I have started work on an app for Prosper. More information next week.
• I've only been on Prosper since October, but three of my notes are paid off already. In two of the cases, the notes were paid off within days of funding. Strange.
• Mint is awesome and works for Prosper now. It is supposed to work for Lending Club soon.
• I wish Lending Club had 1 year notes like Prosper does. See this post for why I love 1 year notes.
• This week, I noticed a 1 year loan that received 100% funding in about 4 hours. Wow. If you're not using an automated plan, you're bound to miss out on some good notes. Hat tip to Peter from Social Lending Network for the tip.
• Both platforms have been growing aggressively. Now, I fear that a bank or similar institution may buy one or both.
• Lendstats.com and Social Lending Network are some of my favorite resources. If you want to start lending, review these websites for a while before you dive in.
• Eventually, I'd like to be diversified so that no note is over 1% of my portfolio.
• I do invest variable amounts of money though. While I commit $25 to most, I have also put $50, $75 and even $100 into a single note. If a borrower looks really good, he/she gets more money. 
• $100 is my limit though. If I ever have money to invest on the scale of reflective-rupee, I'll bump it up a bit. 

I've started designing my Prosper iPhone app already. I'll have more details next week and hope to have it on the App Store sometime this summer.

Happy lending everyone!

Strategy Shift

I've been happy with my experiences so far on Prosper and Lending Club, but I'm always thinking of ways that I can improve my strategy. Starting out, my main goal was to keep defaults to a minimum. I'd only invest in the safest notes. The problem with this strategy is that it limits returns. People with the best credit also pay the lowest rates, so earning a 10% return isn't easy.


The only way to earn higher returns is to take on notes from riskier borrowers. I've been thinking about the best way to do this and have decided to experiment with two different strategies. The first is to invest in notes from previous borrowers and the second is to concentrate on notes with a term of one year. Unfortunately, both of these strategies are only available on Prosper right now. Lending Club does not offer 1 year loans and does not disclose if a borrower has had previous loans.


Previous Borrowers
Many borrowers choose to borrow again. Sometimes, its to pay off the original loan at a better rate. Social Lending Network has a nice writeup on this, so I'm not going to say too much about it here except that it appears previous borrowers have lower default rates than the average. Hat tip to Social Lending.Network for the idea.


One Year Notes
I really like investing in notes with a term of one year. Here is why:

• Lower default rate due to unforeseen circumstances: Even the best people have problems. Loss of a job, divorce, medical issues or even death are just some of the reasons a good borrower may default. A note with shorter term leaves less chance for these events.
• Lower default rate from scammers: There are people who will take out a loan knowing they will file for bankruptcy shortly after. However, they have to make a few payments to look better in bankruptcy court. If someone is going to do this, I suspect that they would choose a note of longer term so they can pocket a greater percentage of the money. The amount of people doing this is way down, but it will always be an issue.
• Good data: Check out this query on lendstats.com. Out of 172 one year notes, only one is late and none have defaulted. One year loans haven't been around for too long, so don't put a lot of weight into this. This data is encouraging though.
• Less risk from an improving economy: If the economy really starts to recover, I may want to have more money in other investment vehicles. Not having my money locked up for 3 or 5 years makes it more fluid.
• Less risk if Prosper or Lending Club fail: If the platforms themselves were to go bankrupt, there is a good chance that lenders wouldn't get their money back, even if borrowers continued making payments. A quick payback time, especially now when P2P lending is still in it's infancy makes me feel a bit more safe.

There are also some problems with this strategy:

• Lack of selection: One year notes are not a popular option with borrowers. As of this writing, there are only 12 to choose from. Due to the lack of selection and wanting to stay diversified, I can't limit myself to these notes. There just aren't enough.
• Lack of quality: For reasons I'm not sure of, most one year notes are D or E scores. B and C are hard to come by and when they appear, they get funded very quickly.
• More work: Finding good, one year notes is hard. If you don't login to Prosper every day, you'll probably miss some. 

From now on, I'll concentrate on notes from previous borrowers and/or with a term of 1 year. By doing so, I feel more comfortable investing in notes in the B and C grades. I still don't like investing in notes where the borrower has delinquencies or late payments, but I still find that there are notes in lower grades where people have a history of making timely payments.


Happy lending!

Performance Update

At the start of every month, I'll provide a performance update on my Prosper and Lending Club portfolios.


Portfolios are still young
My first Prosper note was funded on 10/11/2010 and my average note age is 3.5 months. I started with Lending Club in March. My portfolios are still young and therefore, have returns that are skewed higher because borrowers haven't yet had time to default.


Prosper

I have a total of 36 notes with none late or charged off. This is up from 30 last month. My return is 10.29%, a slight increase from last month's 9.88%. The higher interest rate reflects acquisition of some notes that had ratings of B and C.

Lending Club

I have a total of 19 notes earning 10.5%. My Lending Club portfolio is very young. I haven't even had a payment yet!

Plans and the future

I will continue to reinvest my returns and also add funds to each account. At this time, I can't really say that I favor one service over the other. Lending Club has a slick interface and has more momentum at the moment, but Prosper offers notes with a length of 1 year which I prefer.

For now, I still consider P2P lending to be an experiment and a secondary investment. I wouldn't participate if I couldn't contribute the maximum amount to my 401k. At the start of 2012, I'll decide to get out of P2P lending, stay the course or increase my investments. 

Favorite Quotes

Once in a while, I'll take a step back from the world of P2P lending and discuss something else. This is one of those times. Here are some of my favorite quotes related to personal finance.


"Society is tilted toward financial slavery, not financial freedom." (Jason Kelly in this book: http://goo.gl/jyEVK)

This quote is especially relevant to the way many americans live their lives. Our financial priorities are completely opposite of what they should be. For various reasons, we spend, spend, spend. We only save if there is something left after we've acquired more stuff.

It should be the other way around. For example, don't sacrifice your future to buy an expensive car. In 10 years, your 60K car will be worth the exact same as my18K one: 0. However, I'll have invested all of the money I saved and my nest egg will be that much bigger. When you're still working at 55, if you want to find me, I'll be at the beach.


"I don't put money in my 401k because I'm young and retirement is a long way off." (co-worker)

This came from a co-worker in her 20s who just couldn't be more wrong. The benefits of saving early are incredible. Check out this link for a well written explanation.


"You need to get a BMW if you ever want to get married." (a boss from a past job)

I was single at the time and considering buying a car. My boss insisted that I get a BMW because that is what I needed to 'attract the right type of girl.' She explained that I needed it to show potential girlfriends that I was financially sound.

I don't think so. I'd rather own a beater and find a woman who likes me for who I am, not for my possessions. If she takes the time to get to know me, she'll soon find out that I am financially savvy.

I didn't go with the BMW, but landed a wife (happily married almost 10 years now) who shares my value system. PS: I don't have anything against BMWs; I just don't think I should have to own an expensive car to find a mate.


"No." (mom and dad)

For my 5th birthday, my parents bought me a shiny new Radio Flyer wagon. Joy! That night, I left it outside and someone swiped it. I didn't even have it for 12 hours. My dad and I hiked all over the neighborhood looking, but it was forever gone.

After we had given up the search, I asked my parents for a new one. The answer was quick and firm: "No." They explained that they had told me to put it away. I hadn't and it was my fault that it was gone. It was a tough lesson to learn, but its one that sticks with me to this day. Take care of your money and possessions. Life isn't always fair, so be careful and responsible.


"2000 dollars?!?!" (Me)

Someone told me recently that their friend spent $2000 on a purse. "2000 dollars" I said! This was followed by a few choice words not fit for younger readers.

Its difficult to imagine a bigger waste of money. Does the $2000 purse do what the $50 purse does 40x better? Will it last 40x longer? Of course not. The main purpose of buying such a thing is obsession with how you look to others. How pathetic and sad.

I don't advocate buying the cheapest piece of junk out there. Buy quality items and take care of them. Quality doesn't have to cost you an arm and a leg.

"You're a cheapskate, aren't you?" and "Hi Mr. Cheapo" (boss and younger sister respectively)

I don't think either of these people meant this as a derogatory statement, they just used the wrong word. "Thrifty" may have been better.

I like to save and it is a priority, but when I have to buy something, I do research and buy quality items. There is a difference between being thrift and cheap:

• I tip well at restaurants, but don't go to expensive places and also don't eat out often.
• I have bought new cars, but have never spent over 20K on one. I maintain them well and drive them forever (>200, 000 miles).
• I maintain vehicles myself to save money, but they only get quality parts and oil (synthetic). I follow the car's maintenance schedule rigorously.
• I maintain my house also to save money. However, I only purchase quality tools and materials. They'll last longer and do a better job.

Read more about thrifty versus cheap here and here.

I do have toys such as an iPad and a motorcycle. However, I always meet my savings goals first. Call me whatever you want, but I'm the one who won't have to work until the day I die.

"Save your money!" (grandma)

My grandmother would constantly drill this into my head when I was a child ("sit up straight" was another popular one). I like it. Simple and smart. We are a country of spenders. We try to keep up with neighbors by buying expensive cars and clothes (and $2000 purses!), but we sacrifice our future for a life of toil. No thanks.

I save my money and encourage you to do the same. Save your money. One more time for emphasis: Save your money!


Bottom line

For me, its all about freedom. Do I want money? Yes! However, I don't want it to buy more stuff with. I want to live life on my own terms. I want to work at a job I enjoy regardless of pay or not work at all. I want to be free of financial constraints. That's all.