~ ~ ~ April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change ~ ~ ~
~ ~ ~ December 2010 Update: Earning 15.6% NAR on Lending Club Investment Portfolio. ~ ~ ~
Once again, I’m pleased to report positive results for my Lending Club investment portfolio.
- My Net Annualized Return is 15.03%.
- Zero defaults thus far. I’ve have had several borrowers test the grace period allowance, and only one hit the “30 days late” mark, but all caught up after being contacted by Lending Club.
- Two loans have been paid off early over last year.
- Five year notes outnumber three year notes 55% to 45% respectively.
- I’ve increased the balance of Lending Club account by 1.5 fold. The 5% cash back bonuses and 1.5% bonus on recurring deposits offers were too good not to capitalize on.
- Forming a LendingClub.com investment club.
As with any performance update that doesn’t show any real blemishes, it’s only natural to want to look under the hood and ask questions. So here is a more detailed look at the what’s, where’s and how’s.
- Account balance. Feeling more comfortable in my original Lending Club investment strategy, as well as an inability to say no to Lending Club’s “free money” promotions, I decided to accelerate my investment plan. If you saw a $50 bill lying on the street, you would be a fool not to pick it up, so if you’re wondering why my account balance ballooned in size by 150% from last quarter’s update, blame LC for enticing me with free moolah.
- Weekly recurring investments. I’m still proceeding with recurring weekly investments, but at an increased rate of $125 per week. As Lending Club’s popularity extends more into the mainstream financial community, the number of loan applications that meet my investment strategy is getting easier to find. Not only am I able to find all I need, I’m getting to the point where I find myself cherry picking between some very solid notes in the 14% to 22% NAR range. Investing $500 per month also qualifies me for a 1.5% cash back bonus on recurring deposits, which exceeds most interest rates on Plain Jane checking/savings accounts.
- Diversification. Per my investment plan, I’m only investing $25 per note to achieve maximum diversification but I am hand picking my notes versus using Lending Club’s automated investing model. This is considered by some to be the “diversipicker” investment strategy, where I’m attempting to spread my risk across as many notes as possible, but only investing in notes that meet my investment criteria. (Note: I made a mistake several weeks ago by investing in the same note twice by failing to pay attention to the “previously invested in” icons in the checkout menu.)
- Focusing on notes greater than 14% NAR. Over the past two to three months, I’ve shifted my risk to Grade C notes and higher. This is perceived to be higher risk based on the borrowers FICO score, however, I would argue the risk of many of these higher credit risk loan applicants is less than or equal to Grade A & B loan applicants simply based on their profession, job history, job security, payment histories, etc. My theory is those who keep their jobs, and have a solid history of repaying their debts, will repay their Lending Club loan.
- Making 15% NAR is a new goal. With the quality of borrowers who are borrowing money in the Grade D notes and higher, I think making 15% NAR or higher is a realistic goal. This depends upon several factors — minimizing defaults, selecting high job security borrowers, etc. — but I think it can be done by investing in people who have, fairly or unfairly, have a credit score that is not reflective of their credit risk. (FYI: Lending Club quantifies my NAR in the 87% investor percentile based on this chart.)
- Three year notes versus five year notes. The popularity of five years notes among loan applicants has taken off far faster than I anticipated. This is due, at least in my opinion, to the attractive nature of making lower monthly payments, which in turn, makes it easier for the borrower to service their debt along with their recurring monthly living expenses. Some investors avoid the five year notes, but from my thesis of investing in those with an in-demand profession and a solid job history, I consider it a minor risk by extending the term of the loan for an additional two years. From my vantage point, it’s a benefit for me, the investor, because I get to make a higher interest rate on a borrower, who not only pays a slightly higher interest rate, but will pay more interest on capital borrowed over the lifetime of the loan if he/she only makes the minimum payments.
Naturally, I’m ecstatic about a 15% NAR performance. Whether or not it lasts, is anyone’s best guess. I’m betting it does, but like any unproven strategy, it’s unwise to count chickens before they hatch.
Screening and reviewing hundreds of promissory notes isn’t easy by any stretch of the imagination, but if you have a sound investment strategy and willing to invest the time to review loan applications from borrowers you believe to be credit worthy, Lending Club is, at least based on my results thus far, superior to nearly all fixed income investments I’ve encountered.
Also, I would be remiss to say I’m somewhat obsessive about selecting superior notes. I probably invest a minimum of one to two hours each week screening, filtering, reading Q&A sections, and asking questions to potential borrowers. Thus far, I would argue my obsessiveness has paid off.
The Lending Club “Investment Club”
For anyone interested, I’ve formed a pseudo investment club with a few personal finance bloggers and other Lending Club investors. Once or twice a week, we share ideas, via email, on the notes we believe are going to pay off in full, plus interest. If you would like to be included on this email list, leave a comment in the section below or send me an email via my contact page.
I’ve also collected a sizable Twitter list of P2P lending investors, P2P borrowers, and employees (and a few founders) who work for multiple P2P lending companies across the globe. So if you’re interested in learning more, or just “auditing the course”, both the email list and the Twitter list might be an easy (and free) way to pick up a few tips here and there.
Quarterly Lending Club Investment Portfolio Updates
April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change
December 2010 Update: Currently earning 15.6% NAR on Lending Club investment portfolio.
September 2010 Update: Currently earning 15% ROI on my Lending Club investment portfolio.
June 2010 Update: Currently earning 14.2% ROI on my Lending Club investment portfolio.
March 2010 Update: Currently earning 13.6% ROI on my Lending Club investment portfolio.