Embrace Peer to Peer Lending

Imagine it is Monday morning. You just had a great Sunday with your family, doing chores around the house and watching a movie together. But now you are back in the literal driver’s seat, and on the drive to work your mind begins to wander, cataloging the day’s tasks.

And then the urge hits you, that tempting nagging gently haunting concern about your retirement account. “Has it gone up?,” you think to yourself. “Oh no, maybe it is down.” You know it really makes no difference, but you realize you have not checked the mutual fund you are invested in within the last three days. You know things are probably fine, but you can’t help but wonder. After all, you and your spouse’s well-being for the next forty years is wrapped up in those tiny digits on your browser screen.

You sigh, wishing there were another way to do this whole investment thing.

The Toll of Volatility

The headache in the first section is the price we pay for trusting our future in the US markets. This is because the market contains what investors call volatility; it can dramatically rise and fall within hours or minutes of breaking news. The supposed benefit of this volatility is that, in theory, things eventually become more steady. Millions of people trust these markets to give them an eventual positive return on their investment. “Give the market patience,” common wisdom says. “Trust your hard earned savings 30 years at a time.”

Then you turn on the evening news and watch channels like NBC Nightly News devote weighty portions of their show to how the market is faring. “The DOW rose/fell today by 1.4%…”, a report will start. Why do they talk about it every day if long term returns are all we should focus on? Because of volatility; because they lack trust. The 2007-2008 financial crisis five years ago was the largest since the great depression, even causing something as steady as copper to rise and fall like a ship in a storm.

Copper Price History

[source: Wikimedia Commons]

When looking at the graphic above (the price of Copper over the past 25 years), it is no wonder that people struggle with checking their retirement fund throughout the week!

The Peace of Peer to Peer Lending

There are many non-volatile ways to invest outside the US markets, and peer to peer lending is one of these. Instead of being tied to the global market, rising and falling on a whim, peer to peer lending returns just steadily trickle in throughout the day.

Of course there remain some risks. Some have lost money. But if a lender remains diversified in at least 200 peer to peer loans, there is an extremely low chance they will experience a negative return. In a study I did in February, only four diversified peer to peer lenders out of 3800 have lost money on Prosper.com.

In contrast, you can bump up your returns by using savvy filters on the available loan pool. Examples of good filters to use target borrowers with are:

  • No past bankruptcies
  • 10+ years of credit history
  • 5+ years of consistent employment
  • 10+ total credit lines on their report.

Lenders who compile a diversified peer to peer lending portfolio out of borrowers like these experience much less volatility than investing in the stock market.

My Experience

I used to be like those folks who was tempted to daily check the status of my retirement mutual fund. Articles kept telling me not to, but I could barely help myself. Checking my account was like a financial version of pornography; it was a need that could not be satisfied.

Then I discovered peer to peer lending. Since then, I found the emotional ease I had been looking for. I am diversified in 200+ notes across both Lending Club and Prosper, so I worry little about the state of my accounts. My returns are refreshingly boring in contrast to the US stock market: they neither rise nor fall by the day, staying at a healthy 13% or more every single day of the year.

Yesterday was Monday, and (against my better judgment) I logged into my peer to peer lending accounts to see how things were faring.

Nothing had changed. I closed my browser window and called my Mom.

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