Beating Broke

Personal Finance from the Broke Perspective

Peer-to-Peer Investing Update Mid-2016

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It’s been a little while since I last wrote one of these updates.  January of 2015 to be exact.  Needless to say, there have been a few changes in my peer-to-peer investing in the last year and a half.  One of the biggest changes, I’ll talk about below.  First, let’s see where my peer-to-peer investing was when we last looked at it.  (You can read the full post here, or just read the recap below.)

Peer-to-Peer at EOY 2014 (Recap)

The biggest change in my Lending Club account at the end of 2014 was the NAR (which is an adjusted rate of return) had dropped from a little over 13% in 2013 down to 9.61% at the end of 2014.  Despite the drop, I felt like that was a pretty good rate of return, and reason enough to continue to invest in peer-to-peer lending.

Two other factors that I looked at were default loans and interest received.  In 2014, there were 4 loans that had gone into default. There had been only one in 2013, but with an increase in investing on my part, the rise was somewhat expected.  The total principle written off in 2014 was $41.87.  Total interest minus fees for 2014 was $115.69.  Take out the written off principle and you still get income on 2014 of $73.82.  Again, not a bad little bit of semi-passive income.

Peer-to-Peer in 2015 and the first half of 2016

So, it’s been a year and a half since I last shared one of these updates.  First, let me do a bit of a quick overview of where the account sits now, and then I’ll share some changes that have had some effect.

Peer-to-Peer income

Beating Broke Lending Club Update
Is Peer-to-Peer Investing Worth Your Time?

I like talking about the income (and resulting rate) first.  Why?  Because that’s the meaty money part of it. 🙂  And I like money.  At the end of 2014, my NAR was 9.61%. Here we are in August of 2016, and my NAR is currently showing at 9.89%.  It’s gone up!  I love when that happens!  There’s a couple of factors that likely have helped with that.  The first is that there haven’t been any defaults since 2014.  Right now, there are 3 loans that are threatening.  1 that’s in that nasty 31-120 days past due category.  Typically, if they get that far, they’re as good as defaulted.  We’ll see, but I fully expect that loan to go into default in the coming months.  The other 2 are split between the Grace Period and 16-30 day categories.  More often than not, those loans tend to come back to the current status.  Having them default could eat into the income for 2016, but that’s one of the risks we take in investing for higher returns.

Peer-to-Peer Income 2015

2015 was a bit of an odd year.  I didn’t pay nearly as much attention to the Lending Club account as I should have, and so, often when I would log in, I would have quite a bit of my portfolio sitting around doing nothing in the cash account.  At one point, I had about 40% of the entire account sitting in cash because I hadn’t done anything with it in a while. That doesn’t equate to good income.  For 2015, the interest minus fees only totaled up to $103.07.  Down from 2014, but purely reflective of my inactivity in reinvesting the cash.  The upside to 2015 was the lack of defaults.  Because there weren’t any defaults, the income minus written off loans was still 103.07.  That’s better than 2014, so even though my inactivity caused a reduction in gross income, it also may have sheltered me from defaults and thus preserved more of the income.

I’ve been a bit more active in 2016, and my income reflects it so far.  As of the end of July, interest received minus fees was at $72.04.  If that trend continues, 2016 will be slightly better than 2014.  One of my goals when beginning this account was to achieve $10 per month in income.  At this point, I’ve done that.  I just have to remain active in reinvesting the funds in order to maintain that level.  Next goal, $20 per month!

Peer-to-Peer Changes

One of the things that I wrote about in my “How I Invest” article was how I wasn’t eligible to directly invest or borrow because of the state that I lived in.  Probably the most significant change since the end of 2014 is that my state is now eligible for both.  I haven’t toyed with the borrowing side, but I have touched the direct investment side.  My experience there is mixed. One of the things I like about it is that you aren’t paying any fees or premiums on the investments that you’re buying.  That means you make more money over the life of the loan.  That’s good.  The downside, to me, is the delay in investment.

Direct Investing vs. Trading Platform

If you’re unfamiliar with how the direct side works, you basically go in and choose which loans to invest in.  You’ve got some ability to filter, but not all the same ones that you have on the FolioFN site.  Once you select some loans, you press the invest button.  Here’s where the delay comes in.  The loan only gets investing if it gets fully funded.  So, if you invest in a loan early in the process, you could be waiting a while before there’s enough investor commitment to fully fund the loan.  Once the loan is fully funded, it goes through a vesting process.  The folks at Lending Club look it over, make sure everything is what it is supposed to be, and then the loan finally gets funded.  And then you wait until the next pay date.  All told, you’re money could be sitting in a committed status for a week or more waiting on all of those steps.  Or, you could pay a small premium (you can filter based on the premium) on the FolioFN trading site and have your investment in your portfolio the next day.

After playing with the direct side, I can see myself using it occasionally, but really keep going back to the FolioFN trading site to do my investing.  My thought is that the sooner my money is working for me, the sooner I’m making money with it.

Institutional Investors

I don’t know that this really qualifies as a change, but it’s something that’s been a topic of conversation a lot over the last year. And that’s the idea that there are institutions who are investing in peer-to-peer investments. One of the biggest issues that many seem to have with this is that it’s meant to be peer-to-peer (it’s right in the name!) not institution-to-individual.  That’s how the traditional loan process works, not peer-to-peer!

Ok.  I get that, but I think there’s also an argument that as the peer-to-peer movement grows, there’s going to be an increasing scale of demand for the loans.  And if the individual investing side doesn’t grow as quickly, there will be a lot of loans that won’t get funded.  It’ll look bad for business, plus it will drive away potential borrowers.  I think as investors, we need to recognize that if borrowers are being driven away because of a low funding rate, it means less opportunity to invest.  What we need to hope for at this point, is that the institutional investors are held at bay, and used for filling those funding gaps rather than let run amok and run the individual investors off.

My Peer-to-Peer Investing Going Forward

Much like many of my other updates, which you can read on my Lending Club page which has links to those and other related articles, I just don’t see any good reason to stop or even scale back my investment in peer-to-peer investing. The return remains excellent, and defaults remain low. As I’ve mentioned in other updates, I believe some of that is just plain luck, and some of it is due to scale. I’m only working with a little over $1000 in the account, so it’s pretty easy to be a bit picky when selecting loans to invest in. If I were working with a lot more money in my account, I couldn’t be as picky, and would likely see my rate drop some and my defaults rise.

The whole idea of this experiment (it’s really gone beyond an experiment now) was to let the account organically grow. Invest a bit of seed and reinvest the principle payments and interest so that it’s all working to make more money.  In short, I’m letting the miracle of compounding interest work for me. And so far, it’s working quite well.

What are your experiences with Peer-to-Peer investing?  Is it working for you?  Do you have questions before you dip your toes in?  Let me know in the comments!

Investing for Social Good

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This post brought to you by American Century Investments. The content and opinions expressed below are that of Beating Broke.

What if you could invest your money knowing that your investments were making a difference?  We all want to make a difference.  We usually do so by volunteering our time or by making cash donations to a cause.  We do it with intent.  But, we have to actively do it as well.  I’ve talked before about the benefits of passive income, or income that is generated with little to no work on your part.  Can we do more through passive giving?

American Century Investments is an investment company. As of March 1, they manage nearly $140 Billion dollars in investment assets.  But, that isn’t what makes them special.  What makes them special is what they do with their profits.

ACI was founded by a man by the name of Jim Stowers in 1958.  Jim  was a cancer survivor, as is his wife.  In 1994, they founded the Stowers Institute for Medical Research.  To help fund that institute, they created an endowment of $2 Billion that was made up of some cash gifts, and a 40% equity (ownership) in American Century Investments.  Why is that important?

Because of that ownership stake in ACI, more than 40 percent of American Century Investments profits have been distributed to the Stowers Institute for Medical Research, a non-profit basic biomedical research organization. The Institute is the controlling owner of American Century Investments and has received dividend payments totaling over $1 billion since 2000.

$1.2 Billion in dividend payments.  I’m going to let you think about that for a minute.

$1.2 Billion dollars is a lot of money.  And because of the social thinking of the Stowers’, that money is going towards medical research.  Research that could provide clues to cure disease.

Now, I don’t want this to come out sounding like a sales pitch.  I want you to do your research before you invest your money with anyone.  I do.  If you’ve got a financial planner, talk to them before you do anything.  But, what I do want to say is that, all things equal, if you can invest with a company that does a great deal of social good and still get equivalent returns with equivalent expense ratios, then wouldn’t you do that?

Ultimately, any financial decision you make shouldn’t be based on emotion.  It should be based on numbers and facts.  9 out of 10 times, if you make a decision based on emotion, it’s going to be the wrong one.  I know that.  You should too.

But, I also know that my grandmother is a cancer survivor.  My mother is a cancer survivor.  I lost an aunt to cancer.  Knowing that a portion of the profits of the company that I invest my money with is going towards research that could someday make cancer a curable or preventable disease is a pretty powerful motivator.  An emotional one, to be sure, but powerful nonetheless.

All things considered, when it comes time to choose investments in the future, I’m going to make sure that American Century Investments is included in the options.  That doesn’t mean I’ll pick them every time (or at all), but because of their structure, and the chance to do a little passive social good, they’ve earned a spot in the selection process.

What about you?  What do you think of the idea of passive social good?  How about the idea of an investment company with a higher purpose?

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Lending Club Returns 2014 EOY Update

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If you’ve been reading here for very long, you’ll know that I’ve been posting and discussing my Lending Club returns since the end of 2011.  For the first year or so, I updated with quarterly updates.   I didn’t do that in 2014.  Part of the reason for that was that it was a busy year for me, and the time to put together a full post on that every quarter just wasn’t always there.  The rest of the reason was that it was beginning to feel redundant to me, so I slowed them down a bit.  Now, I’ll be doing the updates on a yearly basis (twice a year at most) to hopefully avoid that feeling of repeating myself in each one.  On to the Lending Club Returns 2014 update.

If you don’t know what Lending Club is, the simple answer is that it’s a peer-to-peer lending network where people like you and me can both borrow and lend to people like you and me.  Want a little better explanation?  Head over to my Lending Club page to read more.

Lending Club Adjusted NAR

Beating Broke Lending Club UpdateWhen we left 2013 behind, my NAR on my Lending Club account was sitting at 13.16%.  A full year of lending has passed, and, as I’ll explain in just a bit, there’s been some changes to the account.  At the end of 2014, my NAR is now showing at 9.61%.  Down from 2013’s EOY number, but still a very healthy return on my investment.  For comparison’s sake, the S&P 500 returned about 11% for 2014.  So, ultimately, I could be getting more of a return on my money in an S&P 500 index fund.  The biggest difference for me is that each of the loans I’ve invested in on Lending Club has a set rate of return.  The only thing that changes that rate of return is a default.  I’ll talk about defaults in a minute, but the rate of default is pretty low.  Try and get a set rate of return on an index fund.  Your brokerage will laugh you out of the office.

Lending Club Defaults and Late Notes

As of the time of this writing, there are no late notes listed on my account.  In 2014, three notes went into a default status.  At the end of 2013, only one had gone into default.  It’s a little bit higher rate, obviously, than it had been previously.  But, as my portfolio on Lending Club has grown, the odds of a default here and there also has grown.  The full picture looks pretty good still.  Since I began investing in Lending Club, I’ve invested in 118 loans.  Only 4 of those have gone into default.  That’s a default rate of about 3.4%.  Flip that around, and if the trend holds, 96.6% of the loans I invest in will not default.  96.6% is a pretty good success rate if I do say so myself.

The 4 loans that have gone into default meant a total of $52.17 in written off principle.  Of that $52.17 that was written off, $10.74 has been recovered through collections for a total loss of principle of $41.43.  I’ll go into further detail in the next section, but the interest I make on the non-default loans more than makes up for that lost principle.

Lending Club Income

The biggest reason that I invest in Lending Club is for the higher rates of return and the income that it provides to continue building my portfolio.  I bank the interest payments and then reinvest them into new loans when I’ve passed $25 in available funds.  Those interest payments, after fees, totaled $115.69 for 2014.  That’s up from $109.88 in 2013.  Less of an increase than I expected, honestly, but still $115.69 that I didn’t have before.  And it still leaves me with about $75 in income on the account after you account for the lost principle that was written off.  And that’s $75 that I’ve reinvested into principle and am now earning interest on.  Given my current rate of return, I can expect that to increase by about $12 next year.

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Another of the metrics that I like to look at is the average amount of interest earned each month.  I reached point where the payments (principle+interest) each month exceeded $25, and I could make reinvestments each month, but the next benchmark I’d like to reach is to make $25 in interest each month to reinvest.  That’s one new loan to invest in each month.  The average for 2014 was $9.64, so I still have a way to go, but it’s increasing year over year.  It was $9.16 in 2013, $5.94 in 2012, and $1.91 in 2011.

I think the thing that I like the most about Lending Club is the income potential and the growth I’ve managed with my portfolio.  I haven’t deposited any new money into the account since November of 2012.  Through active investing and reinvesting, my portfolio has increased by almost $200.   I think that’s pretty good on deposits of just a hair over $700.

The Future of my Lending Club Portfolio

In the past, I’ve talked about changes I planned on making to my investing strategy in this section.  I’m pretty happy with my returns, and with the numbers that I’ve just shown you, and so there won’t be any immediate large changes.  If the default rate jumps by a lot, there’s a good chance that I might begin investing a bit more conservatively. But, if it holds steady, I see no real reason to do so.  My portfolio is pretty heavily weighted towards the B and C grade loans in any case.  And I don’t know that moving to A grade loans would give me the return I’m looking for.  So, short term, there won’t be any changes to my investing strategy.  I’ll just continue to reinvest the payments and see what kind of growth I get in 2015.

Do you have any questions I can answer about my experience with Lending Club?  Other things related to peer-to-peer lending that you want to know?  Let me know in the comments below, or through the contact form linked in the bar on the left.

Want to open an Investment account with Lending Club?  Click here to start the process.