Lending Club Returns Update 4Q13

Another quarter has come and gone, so it’s time for an update on the Lending Club returns I’ve been getting on my account.  At the end of the third quarter, my account was sitting at a return rate of 14.69%.  It’s actually improved a bit since then, but Lending Club has also added the ability to adjust the displayed NAR, which does some funny stuff (see below) and reduces the rate a bit.  I think that’s a good thing (again, see below) and that’s the rate I’ll likely be using for future updates.

Lending Club Adjusted NAR

A few months back, Lending Club introduced what they’re calling an adjusted NAR.  Basically, it uses the historical charge off rates of loans at the different stages of delinquency.  Obviously, the current loans have a historical rate of charge off of 0%.  Once they go into the Grace Period, about 23%, 16-30 days late, about 49%, 31-120 days late, about 72%, and in full default, about 86%.Beating Broke Lending Club Update

As an example, my portfolio currently has two notes that are in the 31-120 days late category.  So, when Lending Club is adjusting my NAR, they use the 72% figure and assume that 72% of the principle will be lost.  Using that number, they then calculate the new, adjusted NAR.  With the two notes late, my adjusted NAR is currently showing as 13.16%.  Still a very healthy number, and likely a more realistic number.  I like the new adjustment, as it should give investors a more realistic number to look at.

Lending Club Defaults and Late Notes

As I mentioned above, my portfolio currently has two notes that are 31-120 days delinquent.  And, if you go by the historical numbers, those two notes have about a 72% chance of eventually going into collections.  I’ve been lucky enough to only have had one note actually go that far to date, and the collection agency was able to get a bit of that money back for me.  It wasn’t the entire amount owed, but a significant portion of the principle, which I was happy for.  I could try and sell off the two delinquent notes, but at this point, I wouldn’t get much out of them, so I think I’ll just ride them out and see what happens.  The total principle involved is only about $35, so it would mean about a month and a half of lost interest payments.  That’s a risk I’m willing to take.

The Future of My Portfolio

With the rates I’m getting, I don’t foresee stopping my investing through Lending Club.  I may even start putting some more money into the account sometime in the future.  At the moment, I’m content to just leave it and reinvest the payments each month.  I’ve seen a few other investors that have either significantly changed how they’re using Lending Club, or have begun backing out of it altogether.  I think it’s something that you need to be able to change how you do it, but I also believe that backing out altogether is a mistake at this point.  The technology is still relatively new, and many of the changes that we’re seeing Lending Club make have been for the better.

I’ve created a page that consolidates all of the posts I’ve done on Lending Club, as well as the quarterly updates since I began doing them.  If you’re interested in starting to invest in Lending Club, you can read more on my Lending Club page, or you can sign up for an account and give it a go.

The Case for Buy and Hold Investing (#AAPL)

I’ve always been a proponent of the buy and hold method of investing.  If you’re unfamiliar with the concept, it’s basically the method of buying a stock (or bond, mutual fund, etc) and holding it forever.  Well, maybe not quite forever, but certainly for as long as you don’t need any liquidity.  For most, that’s pretty much right up until retirement.

I’ve been playing at investing for many years.  Over a decade.  To say that I’m successful would be stretching the truth just a bit.  I remain a buy and hold method advocate however.  Let me give you a couple of examples.

My investing history goes a bit further back than this example, but these are both examples from when I got a bit more serious about investing.  But, also a time when I was still very new to real investing and learning the world of investing the hard way; by trial and error.

Let’s start with what could be one of the strongest reasons why you should do your research, pick a stock, buy it, then hold on to it.

Buy and Hold AAPL

In October of  2000, I bought 3.95 shares of stock in a company you might be familiar with.  Apple Computers.  (AAPL)  For those 3.95 shares, I paid a grand total of $47.25 (including $5.98 in trading fees).  The stock had recently split, so the price was down.  As an IT professional (or at least a future one at the time), I was pretty familiar with Apple and thought well of the company.  I bought the stock with the idea that it was a company that I liked, and wasn’t likely to disappear.  That’s about the extent of the research I had done.  Back then, I invested with a company called BuyandHold (define irony, eh?)  but I mostly invest in stocks through Sharebuilder and Kapitall today.

Somewhere around April of 2001, I began thinking that I really should be buying stocks that paid a dividend if I wanted my portfolio to grow.  Note: I still believe that the majority of your portfolio should be giving you income in the form of passive income (e.g. dividends).  At the same time, the Apple stock that I had purchased not only didn’t pay any dividends, but it’s price per share really wasn’t going anywhere at all.

Of course, all of this was before the coming of the iPod, iPhone, and iPad.  Those didn’t come around until a few years later.  At the time, Apple was just a computer company that made some pretty cool machines, but not much else to speak of.  On May 1st, 2001, I sold my entire position in Apple for a grand total of $47.25 (after $2.99 in trading fees).  If you do the math (I have), I sold it for a profit… of $0.29.  Yep.  Not even thirty cents.

But, that’s not the lesson.  Here’s the real lesson.

In 2005, riding the success of the iPod, iPod Shuffle, and iPod Mini, and the iPod Nano, the stock of Apple began to rise. And then they released the iPhone in 2008.  And the iPad in 2010.  And their stock has never looked back.

The Buy and Hold Lesson:

If I had held on to those 3.95 shares of AAPL, and reinvested the dividends that Apple began paying in 2012 (bringing the total to 3.978 shares), they would be worth $2227.83.  The difference?  $2180.58.

It’s no small amount.  And a painful (to the wallet and ego) lesson.

Of course, hindsight is 20/20.  There was no way, back in 2001, that I could have possibly foreseen the successes that Apple would have nearly 5 years later.  But, if I had stuck to my buy and hold policy, and not worried about the details, I’d have a better looking portfolio now.

What about you?  What stock did you sell that you shouldn’t have?

How to Get Started with Lending Club

Over the past couple of years, I’ve been talking about peer-to-peer lending.  I’ve shared my returns each quarter (see last quarters’), and shared how I go about selecting the loans that I invest in via FolioFN.  One thing I haven’t talked about in detail is how to get started with Lending Club.  So let’s do that.  Let’s talk about how the strategies that you can use to get started with Lending Club.

What is Lending Club

Before we talk about strategy for investing with Lending Club, we need to briefly discuss what Lending Club and other peer-to-peer lenders are.  They act as a service for both borrowers and lenders.  As an individual, you can apply to get a loan, or you can invest in a loan.  If you’re getting a loan, the peer-to- peer lender will vet the loan for risk, and then provide that information, anonymously, to the prospective investors.  As an individual, you can also invest in the loans that have been vetted.  The borrower then repays their loan just like they would if it were borrowed from a traditional lender (banks, credit unions, etc) and each payment (with interest included) is split out to each of the investors.  In short, they make you and the other investor/lenders into the bank.  There’s a lot more too it, but that’s the basic rundown. Now, lets talk about three strategies that you can use to get started with Lending Club.

Go Big or Go Home Strategy

Getting Started with Lending ClubThere are some people who refuse to do anything on a small scale.  You know who you are.  If this describes you, this is likely the strategy that you will use.  Decide on the percentage of your overall portfolio that peer-to-peer lending will be, then calculate how much of an investment that means you’ll be making.  Deposit that amount into your Lending Club account and start investing it into loans.  Depending on the size of your deposit, it might still take a little time to get it 100% invested into loans, but you’ve got the full amount in the account and ready to go.  As you progress, you’ll also want to make regular deposits that match the % of portfolio that you’ve set for your investment accounts.

Slow and Steady Strategy

Some people really like systems.  They like to decide on a path, set the system that will take them down that path and rarely deviate from that system.  In this strategy, you still decide what the percentage of your portfolio that your Lending Club account will occupy.  But, instead of making one large deposit to assign it, you make several smaller, timed deposits to bring it up to the % of portfolio that you’ve decided on.  Each deposit will be invested as you go.  Ongoing deposits will likely be larger than they would be with the above strategy because you’ll be increasing the account balance to match the % of portfolio as well as including your amount of new investments.

Get Your Feet Wet Strategy

Some of you are still a bit leery of peer-to-peer investing.  You’ve heard that it’s risky.  You aren’t sure if it has a future, or, more specifically, if it has a future in your portfolio.  Maybe you like investing in high-value stocks and bonds and playing it safe.  But, still, you’re tempted.  Tempted by the rate of return that I and others are claiming to receive.  This is the strategy for you.  Instead of selecting a percentage of portfolio like the above two strategies, you want to just get your feet wet a little and test the water.  Decide, instead, on an amount of money that you want to use to test the waters.  At a minimum, it should probably be something like $125-$250 minimum.  That amount will allow you to invest in $25 increments and reduce your risk by having at least 5-10 loans in your account.  Using this strategy lets you feel the system out with a minimal amount to lose.  Even if you lose it all, it’s not a large percentage of your investments.

Get Started with Lending Club

As investors and stewards of our money, it’s important to find the best way to handle our money.  For many of us, that means finding ways to eliminate our debt, earn more, and invest smartly.  I’m not a financial adviser.  I’m just some guy that likes learning things about money.  I share those things, and my thoughts on them here.   One of the things that I’ve been using to grow my investment portfolio is Lending Club.  I’ve been very happy with the service, and I recommend it.

Which strategy do I use?  At this point, I still have significant debt.  I happen to believe that investing while you are in debt is not all that smart.  So, I’m more focused on my debt than I am on investing.  I’m still firmly in the get your feet wet strategy with my investments.  In the time I’ve been testing the waters, my portfolio has grown to quite a bit more than the minimum investment I suggest above, but that’s where I started, and that’s the strategy that most closely resembles my usage of Lending Club today.

If you’re thinking about getting started with Lending Club, be smart, know that there are risks, but I don’t think they are as bad as some would claim.  Know that, just like stocks, there is a chance that you will lose your entire investment.  Just like investing in stocks, that chance is pretty small.  I’m not an adviser (that hasn’t changed in the last two paragraphs) so if you’ve still got questions, and want professional advice, I suggest you talk to your adviser first.

I’ve consistently been getting returns on my money of 13-14%.  Even in the boom times of online savings accounts, the interest rates weren’t that high.  Heck, even if you believe Dave Ramsey and his 12% returns on stock investments claim, it isn’t that high.  Getting you feet wet in Lending Club offers a potentially good rate and, I think, is worth a try.

Original Image Credit: Feet by lukasberg, on Flickr