You already know that I like Lending Club as an investment vehicle.  The returns are good (or great, depending on your default rate), and I like the idea that my money isn’t going to line the pockets of some corporation, but is being used to help someone who needs a loan get a better rate than they might get at a financial institution or through credit card usage.

Recently, Lending Club started offering IRA accounts to the lenders.  My first thought, was something along the lines of “that sounds kinda cool”.  But, then I got to thinking about it.  Many of us struggle to put money away for our retirements.  Do we really want what little money we have put away in an investment that carries as much risk as Lending Club notes carry?  I like risky investments, but even I don’t think I’d want all of my retirement money in these notes.

One use that could redeem it is using it as a supplemental IRA.  If you’ve already got a 401(k) and an IRA that you use to invest in more traditional, lower risk, investments, you could use a Lending Club IRA as a way to diversify further and add a little more risk to your portfolio.  That would also allow for keeping a higher percentage of your 401(k) and standard IRA in investments that are a little less risky.  Of course, that would also mean balancing your investment portfolio over several accounts.

I tried to figure out some of the finer details of the Lending Club IRA through their site, but either it isn’t all that clear, or I’m just a bit dense.    So, I emailed them to get a few questions answered.  Here’s what I found out.  The accounts are administered through a company called Self Directed IRAs.  I’m not all that familiar with what a self directed IRA is, but it basically looks like an IRA account that you can use to invest in just about anything.  They offer several different IRA “types”, so it will depend on which the LC IRA falls under to determine what other investments you can add to your account besides the LC notes.  It doesn’t seem out of the question to assume that you would be able to invest in stocks and such as well.  (I’ve replied to the email I got to try and determine this for sure)  Based on what I was seeing on the administrators website, it was looking like the account might be pretty heavy in fees.  The email from Lending Club managed to answer that question as well.

There are no fees associated with a Lending Club IRA with a balance of at least $5,000 in the first year (you have all year to reach this), or $10,000 in the second year and beyond.

If you don’t meet those requirements, the account carries a $100 annual fee.  Pretty hefty if you don’t meet the requirements.  There’s two ways to look at that, however.  If you’re IRA is large enough, it shouldn’t be a problem to keep $10,000 in Lending Club notes and still keep your risk diversification.  If you’re IRA is smaller though, you’d be automatically raising the risk of the account my meeting the requirements.

Anyway you look at it, I don’t think it will be the most popular IRA account around.  But, it’s nice that they offer it for those of their customers who want a tax sheltered way to take advantage of peer-to-peer investing.  You can read more over on their site: Lending Club IRA.

What are your thoughts on the Lending Club IRA?  Too risky for retirement funds?  Good as a part of the retirement portfolio?

As I mentioned in my last post, I’ve been taking 10% of my income from my online ventures and splitting it between my Lending Club account and my Sharebuilder account.  It’s been a bit of an experiment.  Nothing scientific, but a test to see if I drop the same amount of money into each account, what the returns and stability would look like.  My returns on Lending Club have been very good, and the stability has been good so far.  Let’s take a look at the Sharebuilder account.

So far, I’ve got about $264 put into the account.  (Yep, I’m a heavy hitter. )  So far, I’ve got six investments that I’ve split the money between.  There’s also about $50 that is in cash at the moment.  I’ll explain why that is in a bit.

• ARCC
• CIM
• LTC
• MAIN
• NRGY
• TICC

If you’re like me, you’ve likely never heard of any of those.  You’re probably more familiar with symbols like WMT, MSFT, APPL, or C.  One thing they have in common, is that they’re all dividend paying stocks.  I like that.  As time goes on, I’ll be balancing out these lesser known stocks with some other, more familiar dividend paying stocks. For now, that’s what the portfolio looks like.  They’re all pretty evenly split as far as portion of portfolio invested.  So far, the only one that is in the green is MAIN, and just barely.

Currently, my Sharebuilder account is showing a -13.30% return.

The Sharebuilder account is getting a bit of a bad rap here.  Part of the reason that the return is so abysmal is that I’ve got a $260 portfolio split up into 6 stocks. Each purchase comes with a $4 fee.  So, right away, the investments have to overcome a $24 loss.  Take that $24 out of the equation, and the account is only down a few bucks, and the return, while still negative, is far less so.  That also brings us to the cash that’s sitting in the account.  Previously, I would make a purchase when the balance got over $34, so that, once the $4 fee was taken, I was still buying $30 worth of the stock.  After seeing what that was doing to the results, I’ve changed that, and will likely start making purchases in $50-$60 lots.  It will take longer to build the portfolio, but the impact of the fee will be lessened.

Overall, there really isn’t much comparison of the returns between the Lending Club and Sharebuilder accounts.  Taken on their face, Lending Club wins hands down.  I have to add, however, that the investments available in the two are very different.  For the most part, you won’t lose an investment in Sharebuilder.  Unless you invest in the next Enron, that is.  With Lending Club, the risk is higher, because a borrower could default on the loan and you could lose all of that money if they do.  But, there’s an obvious trade-off here.  For the higher returns of Lending Club, you have higher risk.  Less risk, with Sharebuilder, gets you less returns.  Simple as that.  I’ll likely continue doing both, for a while and see what the 1 year comparison looks like in July.

Have you ever used Sharebuilder?  Where do you put your investments?  Do you have a “fun” account like my Sharebuilder account?

As I mentioned before, I’ve been taking the normal 10% contribution amount that most would be putting into their retirement accounts and splitting it between my lending club account, and a sharebuilder account.  It’s been a bit of an experiment.  I happen to think that lending club is a relatively safe investment option for a portion of your portfolio.  I’ve still got my 401(k) from my old job, so the investments that I’ve made at lending club and in the sharebuilder account don’t even really make up 5% of my total investments.  In short, I can afford to get a bit risky with the money.  So far, it’s been anything but risky, however.  I’ll update on the sharebuilder account in another post.  Let’s take a look at what my lending club account has done.

To date, my investments look a little like this:

• Total loans invested in: 24
• Total loans paid off:5
• Total loans defaulted: 0

With only 24 loans, it could be that I’ve just been lucky thus far.  I’ve had a couple of the loans go past due by 10-15 days, but nothing that hasn’t been caught up and made current.  And no defaults.  As I continue, I expect that I’ll see one or two.  With all the doom and gloom about the economy recently, I fully expected to see one already.

To date, I’ve deposited $257.20 into the account.  That includes money from before this experiment started, so it’s not all recent.  With that 257.20, I’ve invested in $511.36 in loans.  The math savvy of you will notice that the invested amount is quite a bit more than the deposited amount.  That just means that the money has turned over almost 100% since being invested.  The more recent money, which accounts for about 50% of the account hasn’t had a chance to turn over yet, or that number might be higher.  My total income, minus fees, is $36.26.

My portfolio breaks down like this:

• 39% of the loans are D grade
• 25% of the loans are B grade
• 15% of the loans are C grade
• 9% of the loans are F grade
• 7% of the loans are E grade
• 4% of the loans are A grade

As you can see, I’ve gone a bit riskier and weighted the portfolio towards the higher grades, but is still heavily centered around the C/C+ grade.  (Read this to see how I select loans)That keeps my return a bit higher, while also keeping the risk a bit lower.  Speaking of return, what is mine?

According to lending club, my net annualized return is 12.82%.

I like that.  It’s far better than any bank or credit union is going to pay me for my money.  To get that, I give up the liquidity of the money (I’d have to sell my notes to get the cash), and I give up some of the stability of the money (it’s riskier than a savings account or CD).  Because this isn’t my emergency fund, or normal savings, I’m ok with giving up both of those things, in exchange for an above average return.

Do you invest with peer-to-peer lending?  Do you use Prosper? Lending Club? Both?  How’s your return?

Even though college students usually don’t have a ton of cash, it’s still possible for you to begin investing while you’re still in school. A small amount of money taken from whatever source of income you may have could build into a portfolio worth a lot of money, providing it’s managed correctly. The investment strategies used by anyone who buys stocks, bonds, or mutual funds could earn money for you, too. Following are a few investment tips for college students.

Start Small

In order to begin investing money for your future, it’s not necessary to have a lot of money, but you shouldn’t neglect paying bills to do it. If you manage your money well, you should be able to set aside a few dollars from each paycheck for investment purposes. Doing this will benefit you in more ways than one. First of all, the money that’s invested will earn you more money if you do it right, and the lessons you learn from investing now will serve you well for the rest of your life. Even if you end up losing a bit of money in the beginning, you should be able to determine whether or not you made a mistake in your investment strategy, and if so, how you can avoid doing it again.

Invest Regularly

It’s important that you develop an investment plan that will allow you to set aside a few dollars on a regular basis. Sticking a few bucks here and there into stocks or bonds most likely won’t earn you a good return, and isn’t a sound investment practice. Instead you should invest regularly by allocating a certain amount of money from each paycheck, even if it’s not very much. When setting up your investment account it’s important to make sure you won’t be able to touch the money easily–it could be too tempting to take out a few bucks now and then to buy tickets to the big game or a getaway at spring break. A sound investment strategy is called for–one that will hopefully grow consistently.

Investment Clubs

If you know other people that are interested in learning how to invest wisely, it may be a good idea to join an investment club or start one yourself. By sharing information and knowledge with other people who have similar goals, you can all learn how to invest your money with a realistic hope of making a profit. Make it a point to meet regularly and go over your investment strategies. Finding out the mistakes investors make now, while there’s relatively little money at stake, can save you money in the future. Another important aspect of being involved in an investment club while you’re in college are the contacts you’ll make, which will hopefully last for the rest of your life. Different people have varying skill sets, and you can learn to take advantage of the talents of others while they can feed off yours.

Spread Out Your Eggs

You’ve no doubt heard the expression, “don’t put all your eggs in one basket.” That’s sound advice under most circumstances, and nowhere more so than when investing money–especially if you don’t have much cash to begin with. If you have $500 to invest and use it to buy a few shares of a stock because you got a hot tip, you may as well go to a casino and bet it all on red–your chances of making money are just about as good. Instead you would probably be better off spreading that money around by opening a savings account or getting into a mutual fund. If you do decide to enter the stock market do as much research ahead of time as you possibly can–and even then hold a few dollars back to invest in other stocks or bonds.

Seek Professional Advice

Probably the best advice anyone can give you is to seek professional advice before investing any money. Ask your parents, relatives, and friends if they can recommend a good financial planner or accountant. Before signing any papers, make sure you read the fine print. Keep in mind that the best investment strategies are those that allow you to make money steadily over a long period of time. Sure, some people make a quick killing in the stock market, or by investing in other things, but for the most part the people who are successful investors are those who are patient and research their investments.

Guest post from Taylor Harris. Taylor writes about online colleges and universities for BestOnlineColleges.com.

photo credit: epicharmus

It’s important to trust your financial advisor.

A few years ago I caught a story on the local news about a financial advisor from my hometown who was arrested for violating that trust. He had been a financial advisor for many years and was charged with financial exploitation of the elderly.

In one instance, he had sold one of his elderly clients an annuity. She trusted her advisor and considered him a friend so she wrote him a check. Did you catch that?

A check directly to him, not the insurance company, in the amount of $20,000 and then he disappeared. As it turns out, she was not the only client  that had been taken advantage of.

Financial Planner Violates Trust

When I see story like this, I’m angered because I love my profession, I love what I do, and I love earning my clients’ trust. But when you have individuals as such; that abuse that sacred trust with their client, it gives my profession a bad name. You may be wondering if this could happen to you.

What To Do If Your Financial Planner is Crooked

• If the advisor asks you to write him a personal check, that is a clear red flag. Never, never, write out a check directly to the advisor. Especially, if you are purchasing some kind of investment product.
• If you recently purchased something but never received anything in the mail, call your advisor and see if you can get a copy of the confirmation ticket. (think of the confirmation ticket as your receipt of purchase)
• If your advisor is guaranteeing an outrageous rate of return, be extremely cautious. I ran into a competitor that was guaranteeing 12% return on his mutual funds he was offering.

Background Checks On Your Advisor

Start by thoroughly researching any broker, financial planner, or adviser you are considering hiring. Explore the North American Securities Administrators Association Website, www.nasaa.org, or call 888-84-NASAA for a regulator in your state.

State regulators, along with the National Association of Securities Dealers, jointly maintain a database of more than 650,000 stockbrokers and 5,000 securities firms. Known as the CRD, or the Central Registration Depository, the database contains critical information, such as whether a broker has ever been sanctioned or fined for investor wrongdoing.

To check CRD records, contact FINRA’s consumer hotline at 800-289-9999, or visit the them online and use their “Broker Check” system.  You’ll be amazed on how much information you can find out about the financial advisor including such things as: previous work history, outside business activities, and if they have any judgements against them.

You shouldn’t just do a background check on the financial advisor you’re considering hiring.  You should also consider doing some research on the one that you are currently working with.   You never know what you’ll find out and it literally only takes a few minutes to find out.

Jeff Rose is an Illinois Certified Financial Planner. He blogs at Good Financial Cents and Soldier of Finance. He loves Crossfit workouts, writes about Roth IRA rules and craves In-N-Out burger.

photo credit: seniorliving.org

Prosper.com, the social lending site, is having a super special to honor our veterans this weekend.  Starting today (11/11/11) through Tuesday (11/15/11), they’re doing some special stuff for veteran’s loans.

1. $50 Donation for Every Listing to the National Military Family Association
   Prosper will also donate $50, up to $10,000, to the National Military Family Association (www.militaryfamily.org) for each loan that is listed as a part of this program during the program period and subsequently originated.*
2. Second Payment Free for Vets
   US Veterans and active military who apply for a loan during the program period and get a loan, will get their 2nd payment free, up to $250.**

If you’re a veteran and want to take advantage of this great program, you can sign up for Prosper and get more details.

Happy Veterans Day!  Thank You to all those who are and have served for our country!

One of the terms that is always circulating the personal finance area is the term “Passive Income”.  What is it?  Why do we keep talking about it?  How do we get it?

What

Passive Income is income that you don’t have to actively work to attain.  Residual income like royalties on a book, dividends on dividend stocks, and interest earned are all examples of different kinds of passive income.  Some would argue that the work you have to put into all of those to write the book, purchase the stocks, or earn the money to make the interest make those less than passive, but in my definition, any income you earn that is new income, even if it is earned off of old income that wasn’t passive, is passive.

Why

The reason that we all want passive income is pretty self-explanatory.  It’s additional income that you don’t output any work for.  You purchase the stocks, and the company just sends you a dividend check every quarter.  You write a book, and then the publisher sends you a check based on it’s sales.  You deposit your money, and it accrues interest.  Beyond that initial setup, you do no work to continue the income stream.

How

The how of passive income is usually where people hit the brakes.  You see, when people think passive income, they immediately think “easy money”.  But, the truth of it is that there is nothing “easy” about it.  You do have to put in the work to set it up.  Some passive income streams are easier to set up than others.  If you’ve already got the money, you can pretty easily set up a passive income interest stream.  Or a dividend stock income stream.  But, unless you’ve already written several books, you’ll still have to write the book to set up the royalty stream.

The more passive income streams you have, the less work you have to do to maintain the level of income you have.  With some hard work to set them up, you can stop thinking about side income jobs, and thinking about how you’ll spend your “passive” time building more passive income streams.  It isn’t easy, but it can be very rewarding once you’ve got the streams all set up and working for you.  And, even if you have to do a little bit of minimal maintenance once in a while, you’ll still be earning far more for your time than you would on any non-passive income stream.

photo credit: alancleaver_2000

As I mentioned in my previous post on finding a Real Rate of Return for My Lending Club Portfolio, I am unable to invest directly into the loans on Lending Club.  There’s some regulatory issue between Lending Club and my state that makes it that way.  So, I have to purchase my investments through their note trading system called foliofn.  Not a huge deal, but it makes it a bit more interesting.

Using the Lending Club foliofn Search

First, I have to search for available investments.  They’ve got a decent search, but it’s missing a few key things that really would make it top notch.  Here’s what you’ve got as far as filters for the search, and, also how I usually set it up when I do a search.

I don’t like seeing anything that’s been late, or is currently late.  Late payments don’t show any intention of improving your situation, so I’m not going to take a risk on you if you don’t take it seriously enough to pay on time.  You’ll notice that I also change the remaining payments to 56.  The max is 60, but it’s hard to eliminate those who have been late if they haven’t had the chance to be late, so this makes it so that a few payments have to have been made.  Of course, there are shorter term loans available in Lending Club, so you’ve got to keep an eye out for those.  I don’t really limit the rates at all.  I’ll explain why in a moment.  Here’ s a sample of the results you’ll see when you do a search (click to see bigger).

Picking an Investment

As you can see you get a really basic overview of the available loans.  They’re all sortable.  I usually sort by Asking Price because I usually have a set amount of available funds in my account and I want to purchase investments that will come as close as possible to exhausting those funds.  There are three things that I pay very close attention to when I’m shopping for investments here.  The first is the Credit Score Change.  This is a visual indicator of whether the borrower’s credit score has gone down, up, or stayed the same since the loan was issued.  I only buy loans where the credit score has gone up.  It’s indicated by a green arrow that points up and to the right.  Again, this is a personal preference, but I want borrowers who are want to improve their situation.  It’s what this site is about, and something that I feel strongly about.  I like to think of it as ethical investing.

The second thing that I look closely at to compare the term of the loan with the remaining payments.  This goes back to the late/never late thing.  I’m able to eliminate loans that have been late through the search if the term of the loan is 60 months, but not if it’s anything shorter than that.  I’m looking for loans that have made at least 2-3 payments.  Finally, and most importantly, I look at the Yield to Maturity field.  If I could change one thing about the search on foliofn, it would be to add a way to filter by this field.  Here’s why.  Because foliofn is a secondary market for these investments, you aren’t necessarily paying the price of the remaining principle.  The seller is able to set his own price for the investment.  So, the interest rate on the loan isn’t necessarily what you will earn on the loan.  The Yield to Maturity field shows what the yield on the loan will be when it is paid off.  This field will vary. That’s also why I don’t limit the interest rate in the search, although you could if you were looking for a certain credit level of loan to invest in. If you look at the example above again, you’ll see that the investments shown would be very, very bad choices.  Where you draw the line for the yield will vary based on your personal preferences, but I usually won’t buy any of them unless they are at least 5%.

Further Thoughts and My Results

My goal is to maintain a higher interest rate than any savings account, while maintaining a medium-high risk level.  This means that my portfolio is weighted towards the C-D range loans.  I still keep it diversified amongst the different rate levels, but it’s heavier in that area.  You’ll notice that the results don’t show what range the loan is.  For that reason, it’s handy to know, generally, what the interest rate ranges are for each of the loan credit ranges.  Using the interest rate (not the yield to maturity) field, you can guess where the loan lies.

So, all that goes into it.  I look for an investment that has a upward trending credit score, that hasn’t been late and has made at least 2-3 payments, and that has a Yield to Maturity of greater than 5%.  My portfolio is still rather small, so I try to keep individual investments to a $20-$40 range.  I just don’t want to put too much of the portfolio in one loan and then get caught with my pants down if it defaults.  As the portfolio grows, I’ll likely increase the upper end of this range.  So far, I have had 4 of the investments paid off.  Two of them have been paid off early.  I have had no defaults. That’s a screen grab of my real return on the left.  Adjusted for inflation, using the formula in my previous post, it’s still above 10%.  Try and get that anywhere right now.  My 401(k) is at -0.85% YTD, and my local bank pays 0.25% on savings accounts. Sure, it’s riskier, but I feel the increased return outweighs the increased risk, and I think it will keep it’s place as part of my investment strategy.

I feel that I should make a disclaimer here.  I’m not an investing professional.  None of this should be taken as advice, but merely an amateur sharing information on my portfolio.  See an investing professional if you’re looking for advice.  Otherwise, feel free to share your stories in the comments!  And, as always, if you liked the post, please take a moment to share it using the bar on the left hand side, or at the bottom of the post.

Need an account? Sign up for Lending Club.

For the past month or so, I’ve been performing a bit of an experiment.  I’ve been taking 10% of all income from this and my other sites and splitting it between an investment account and my Lending Club portfolio.  The idea, of course, is to see which performs better.

In order to do that, I needed to find a good way to calculate what the real rate of return to me is.  Here’s the formula I settled on.

(1- (Total Deposits / ((Total Deposits + (Total Interest Received – Fees Paid))*.97)))

I should qualify the rest of this by saying that I’m not the best at math, so there may be flaws here.  Feel free to let me know in the comments.  Also, if there’s a better way to go about this, please let me know in the comments as well.

So, let’s break that down a bit.  The *.97 part is  meant to give some accounting for inflation.  It takes 3% right off the top as an inflationary cost.  Is 3% enough?  That’s debatable, but it seems like a fair average, historically.  This bit: (Total Interest Received – Fees Paid) is merely the total income on the portfolio.  I’m missing a small bit here, as the cost of the principle is not equal to the actual principle of the portfolio.  That’s because I live in a state where Lending Club doesn’t have the right permissions to allow me to directly invest in the loans.  So, I’m having to go through their foliofn note trading platform to buy my notes and there is usually a small premium on the notes.  I haven’t decided on a good way to really include that in, or if it really should be.  The next bit, (Total Deposits / ((Total Deposits + that previous bit is basically determining the % growth.  Total deposits divided by current “balance”.  The 1- part at the beginning just gives the cleaned up decimal percentage.

Let’s walk some numbers through it. We’ll use these:

Total Deposits = $1000

Total Interest Received = $25

Fees Paid = $5

So, plugging those numbers in we get: (1-(1000/((1000+(25-5))*.97)))

We’ll do this old school and solve as we go, showing our work.  Parenthesis get priority, followed by addition and subtraction.  So, we next end up with (1-(1000/(1020*.97))).  Then, we end up with (1-(1000/989.4)).  Next step, 1-1.011 = -.011.  So, we get a return of -1.1%.

Seems logical right?  In the case of my portfolio, the result comes back as 10%.  That’s a pretty good number, if you ask me.  I haven’t had any defaults yet, and I’ve had loans in my portfolio since January of 2010.  (the experiment I talked about earlier only began in July, however, but previous portfolio is included for easy of calculations)

I’m sure there’s some much more complicated formula that would take in risk of default on remaining invested principle, and a way to get the most accurate number, but really, I’m not sure that I want to take it that far.  This will never get to the point, I don’t think, of having a majority of my overall portfolio in it.  It’s not nearly safe enough for that, and my retirement accounts will remain in more traditional markets.

But, with results like 10%, and the current state of the stock market, one has to begin to wonder if the stock market is the safer of the two markets.  The stock market certainly isn’t showing returns of 10% recently.

photo credit: lumaxart

Guest blog post by Lisa Cintron of Advisorworld.com

With the price of gold challenging new all-time highs on a regular basis, more and more investors have begun to consider if the commodity should be a part of their retirement plan. Classically overlooked for multiple reasons, given the current economic landscape, gold should be an element of your retirement fund. Successful retirement planning requires being fully aware of fundamental changes to multiples factors and markets; recent shifts in these forces make gold an important part of a comprehensive plan.

The Forgotten Investment

Gold has been historically overlooked as a part of retirement planning for several reasons. First, securities that are based on commodity prices tend to only come in large denominations and have a healthy amount of volatility. Prior to the introduction of ETFs, futures were the most efficient way to invest in gold; these contracts are large and not appropriate for most investors based on their complexity and volatility.

The other option that was available, other than financial instruments, was to buy physical gold. As most financial planners are merchants of financial products, not physical assets, gold was rarely considered. For better or worse, financial planners are generally focused on those products that can make them a profit. Within that context they may try to be helpful, but if they cannot make a profit, there is no incentive for them to consider other options.

New Products and Physical Delivery

Given the explosion of gold prices, there are now more ways than ever to invest in gold. Some of the available new products include:

• ETFs
• Gold-focused mutual funds
• General commodity funds

Each of these options have different strengths and weaknesses, but each make it more feasible for gold to be included in one’s retirement plans. ETFs, for example, give you direct access to the gold market, allow you to hold gold in a tax-advantaged vehicle, and are easy to trade in small denominations. On the other hand, ETFs do not offer any professional management features and can be volatile. Making a prudent decision between these options requires spending the time to understand the benefits of each and being able to articulate why it should be included. Gold coins are less liquid, but are one of the most stable choices.

Why Gold at All?

Under the current Federal Reserve regime, and given the political unrest that has spread across the globe, inflation may be the single biggest risk to economies at present. In times of high inflation, commodity prices tend to appreciate dramatically. While the Fed argues that core inflation is contained, a trip to the supermarket shows that prices are on the rise. When coupled with global uncertainty that has threatened the strength of the dollar, an investment in an intrinsically valuable resource that maintains its value under all conditions gives you some safety in any otherwise uncertain period.