Search Results for: lendingclub

Reader Story: Early Retirement by Age 40 with Income-Focused Portfolio

The following is a guest post contributed by reader Bob, who started getting serious about financial freedom about 10 years ago and plans to reach early retirement next year at age 40. Thanks Bob for candidly sharing about your personal experiences and income-oriented portfolio.

monodiv_220I started following Jonathan’s blog about five years ago because I shared the same interest in personal finance and the goal of early retirement. I’ve made a lot of investing mistakes over the years, but with my 40th birthday coming up later this month I thought I’d share my approach which had the primary goal of income generation and capital preservation.

My initial goal was to cover my fixed expenses each month (housing, transportation, utilities, etc) from investment income. Once I had covered my fixed costs I expanded the goal to full income substitution for an extended period of unemployment (24 months), and later to full income substitution for 10-15 years. I’d like to say I was focused on a fixed target, but as with everything targets changed based on circumstances.

I started focusing on saving in the summer of 2005. I had graduated with an MBA and took a position at an Investment Bank in New York. I completed my MBA at the University of Texas at Austin largely because the tuition was low and I could graduate debt free. Looking back, this decision turned out be a very good one as I was able to secure a high paying job while investing relatively little in my education. In my view, maximizing revenue and minimizing costs is what personal finance is all about. However in life’s little ironies, I ended up paying through the nose for my wife’s graduate degree at UT in 2013-2014 but at this point we are far more capable of supporting this investment.

One thing I learned early on was that I did not want to be working in investment banking beyond ten years. The job takes a lot out of you and while the money is good and you learn a lot, it can be a very volatile business. Given the volatility in the markets and our annual bonus I decided I’d invest largely in fixed income and as a single guy in New York it made sense to look at tax-free munis. I don’t pretend that I had the foresight into the real-estate and financial crisis of 2008-2009 but I did witness a lot of risk taking and leverage deployed in the pursuit of returns.

I will not go into all details of my portfolio rather I’ll just go over the highlights.

$800,000 in taxable accounts which generate about 6.5% yield through investments in closed-end funds, utilities, and REITs. The vast majority is in muni bond funds as I’d prefer tax free income but qualified dividends also enjoy a lower tax rate. REIT income offers no tax advantage but I hold them as until recently we always rented our home. There is obviously a high degree of interest rate risk in my portfolio, but given I have deployed leverage in other part of my portfolio I’m comfortable with it. Overall I think taxes will go higher and so I’d much prefer munis to treasuries. I also hedge my bond holding by selling naked puts on the TBT (leveraged short treasury ETF). This has the positive impact of boosting my cash returns and hedging my long bond position.

$100,000 in LendingClub which generates a 7-8% return inclusive of defaults. I was hoping for a returns closer to 9% but given the institutional money chasing loans and tepid demand for loans it is not a surprise returns are lower than expected. Hopefully LendingClub does not relax underwriting standards in pursuit of loan growth. I still like this asset as the loans are short-term, payments include interest and principle, and you can invest as little as $25 at a time but I’ll moderate my contributions in the future.

$200,000 in direct real-estate investments through RealtyMogul and Fundrise. I only started investing nine months ago, but I have aggressively added to this asset class. I get geographic diversification across the country and by assets class (residential, commercial, debt, equity) and you essentially cut out the fees paid to fund managers and REITs so I see this as a win-win. It is still too early to estimate returns, but I’m hoping to generate 7.5% on a cash on cash basis and any capital appreciation would be a bonus. Most of the investment promise IRR’s north of 10% so I think the 7.5% is reasonable. I also think this asset class will prove to be better than LendingClub given these are secured investments and debt financing is cheap. On the downside there is zero liquidity, lead times are very long, and the minimum investments are very high.

Overall I’m generating about $6200/month in tax advantaged income and my goal is to eventually get this up to $7000. My savings suffered over the last 12 month as we incurred costs for my wife’s graduate degree, we relocated from Berkeley, CA to Austin, TX and we purchased our first house. I feel confident in ramping up savings over the next months and hitting full income substation before my 41st birthday next year.
I’m sure other will ask how I intend to offset the impact of inflation I also have $500K in tax deferred retirement (IRA, 401K) accounts but these are broadly diversified across domestics and international index funds so not much to say. I think continuing to invest in tax deferred accounts along with real estate investments will help offset the impact of inflation.

If you have constructive questions or feedback, please leave them in the comments. Please remember to be respectful! If you’d like to share your own story, please contact me.

Is P2P Lending So Successful That It Doesn’t Need You Anymore?

lcvsprBeing a peer-to-peer lender been a bumpy ride. Prosper Marketplace was first, but if you were an early investor/lender you’d have been lucky to have gotten back what you put in as most people had negative returns. Then came LendingClub with stricter credit standards and preset interest rates. Both companies operate with similar structures now and appear to have created a viable business model. In fact, LendingClub is planning an IPO with their last funding valuation at $3.8 billion. That’s pretty rosy considering they made just $7 million of profit in 2013, their first year of profitability in 7 years.

I’m not a big lender but I have invested over $15,000 of my own money into P2P loans. In the beginning, I would read every single loan listing as it usually included a story about what the borrower was going to do with the money (pay down debt, start a new business, buy a 200 sf tiny house). After a while, I started using automated software to match with loans, but it still felt like individuals lending money to other individuals. Today, a significant portion of loans are sold to institutional investors like hedge funds, pension funds, and even banks according to the New York Times article “Loans That Avoid Banks? Maybe Not“:

At Prosper, which has been courting institutional lenders over the past year, more than 80 percent of the loans issued in March went to those firms. More than a dozen investment funds have been formed with the sole purpose of investing in peer-to-peer loans. [...] Santander Consumer USA, the United States arm of the Spanish bank, has an agreement to buy up to 25 percent of Lending Club’s loans.

I spoke to a LendingClub representative, and they stated that their investor base is currently “about 1/3 direct retail investors, 1/3 high-net-worth investors, and 1/3 institutional investors.”

Here’s a thought experiment: If somebody like Chase Bank goes to a P2P lender and buys a bunch of unsecured loans made to individuals, is that really much different than that same person just carrying a balance on a Chase credit card?

It used to be individuals who took the risk of lending and reaped any rewards of higher interest. The P2P company just cares about volume as it takes a fee from every loan. But if that volume comes from big financial firms that want first dibs, does that mean the individual investors will only get left with the scraps?

The loans not taken by these sophisticated investors go back to a fractional lending pool that is open to both individual investors and institutions. That doesn’t sit well with some. “The institutional investors are snapping up all the worthwhile loans,” one investor wrote on Prosper’s blog, echoing many comments. [...] “By cherry-picking, almost by definition what they leave behind is not as good,” says Giles Andrews, founder and chief executive of Zopa, a British peer-to-peer lender that so far has dealt only with individual lenders.

Perhaps the best sign that P2P lending sites have become a legitimately good investment is that Wall Street and other professional investors are now crowding us out?

$30,000 Beat-the-Benchmark Experiment – One Year Update, Part 1

It’s finally been a full year since starting my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

I’m splitting this summary up: Part 1 will focus on the Benchmark vs. Beat-the-Benchmark results. Part 2 will include the P2P lending performance. Values given are as of November 1, 2013.

$10,000 Benchmark Portfolio. I initially put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the most popular low-cost, index ETFs from Vanguard and iShares. With no minimum balance requirement, no maintenance fees, and no annual fees, I haven’t paid a single fee yet on this account. The portfolio used an asset allocation model based on a David Swensen model portfolio, which I bought and held through the entire yearlong period.

The total portfolio value after one year was $12,095, up 21%. Here’s how each separate asset class fared from November 1st, 2012 to November 1st, 2013 (excluding dividends):

  • Total US Stocks +$986 (+25%)
  • Total International Stocks +$588 (+15%)
  • US Small Cap Stocks +$150 (+30%)
  • Emerging Markets Stocks -$3 (-1%)
  • US REIT +$72 (+7%)

Screenshot of holdings below:

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$30,000 Beat-the-Benchmark Experiment Update – October 2013

Here’s the October 2013 update for my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

As requested, I updated the scale to zoom in on the comparison chart.

Summary. 11 months into this experiment, the Benchmark and Speculative portfolios are both up between 15-20%. The Speculative portfolio is actually winning now ($12,071 vs. $11,723). I sold all my AAPL shares in September. Both P2P portfolios continue to earn interest and are still on pace for an 8%+ annual return, but the growth rate has slowed lately as late loans have been taking a toll. Values given are after market close October 1, 2013.

$10,000 Benchmark Portfolio. I put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the most popular low-cost, index ETFs from Vanguard and iShares. With no minimum balance requirement, no maintenance fees, and no annual fees, I haven’t paid a single fee yet on this account. The portfolio was based loosely on a David Swensen model portfolio with a buy-hold-rebalance philosophy. Portfolio value is $11,723. Screenshot of holdings below:

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$30,000 Beat-the-Benchmark Experiment Update – September 2013

Here’s the September 2013 update for my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

As requested, I updated the scale to zoom in on the comparison chart.

Summary. 10 months into this experiment, the Benchmark and Speculative portfolios have suddenly pulled neck-and-neck, with less than $25 separating them ($11,060 vs $11,083). Both US and Emerging Markets stock indexes have dropped recently, while my Apple shares have risen in anticipation of new product launches before the holiday season. Both P2P portfolios are still paying out competitive interest although late loans continue to pop up. Values given are as of September 1, 2013.

$10,000 Benchmark Portfolio. I put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the most popular low-cost, index ETFs from Vanguard and iShares. With no minimum balance requirement, no maintenance fees, and no annual fees, I haven’t paid a single fee yet on this account. The portfolio was based loosely on a David Swensen model portfolio. Portfolio value is $11,060. Screenshot of holdings below:

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Mosaic: Crowdfund Solar Projects With Just $25, Earn 5% Interest

Mosaic is a new crowdfunding start-up allows investors to invest in clean energy projects with as little as $25. A solar power farm needs financing to get built. They sell the energy produced to customers like major utilities and then pay investors back. Mosaic takes a cut. Mosaic has recently been more projects since their debut (and sellout) earlier this year.

Below is a screenshot of an actual project with a 12-year horizon with expected 5.5% yield that is currently in funding – the one I was looking at yesterday already funded! If you live in California, you’re likely to be familiar with PG&E which made a 20-year agreement to purchase power from this project. On the production end, Panasonic is guaranteeing a minimum power production level for 12 years (or else they cover the difference). I’m not sure what the interest rates on these types of project would be on the open market, but right now Yahoo Finance shows the average yield on a AAA-rated 10-year corporate bond to be 3.60%.

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$30,000 Beat-the-Benchmark Experiment Update – August 2013

Here’s the August 2013 update for my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

As requested, I updated the scale to zoom in on the comparison chart. You can view it the old way here.

Summary. Values are as of August 1, 2013. 9 months into this experiment, the passive benchmark portfolio remains the leader and if anything is widening the gap. My neglected speculative portfolio has been more volatile and also consistently behind the benchmark in this bull market. As for the P2P portfolio, it is starting to look like LendingClub may perform better than Prosper. Although my Prosper portfolio is earning slightly higher average interest, it also has significantly more late loans which has more than offset the higher interest. I’m slightly above 8% annualized return for LendingClub currently using my metrics, slightly below 7% for Prosper.

$10,000 Benchmark Portfolio. I put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the most popular low-cost, index ETFs from Vanguard and iShares. Also no minimum balance requirement, no maintenance fees, no annual fees. The portfolio was based loosely on a David Swensen model portfolio. Screenshot, click to enlarge:

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$30,000 Beat-the-Benchmark Experiment Update – July 2013

Here’s the July 2013 update for my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.
1307_btmsummary

Summary. Values are as of July 1, 2013. 8 months into this experiment, the passive benchmark portfolio remains the leader despite a slight drop this month. The speculative portfolio has definitely been more volatile and is back to lagging again. As for the P2P portfolio, it is starting to look like LendingClub may perform better than Prosper. Prosper simply has more late loans in the pipeline, although I’m still hopeful for solid overall returns.

$10,000 Benchmark Portfolio. I put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the most popular low-cost, index ETFs from Vanguard and iShares. The portfolio was based loosely on a David Swensen model portfolio. Screenshot, click to enlarge:

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$30,000 Beat-the-Benchmark Experiment Update – June 2013

Here’s a condensed June 2013 update for my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.
1306_btmsummary

Summary. Values are as of June 1, 2013. 7 months into this experiment, the passive benchmark portfolio remains the leader although last month it was pretty flat. The speculative portfolio is bouncing back quite nicely, almost matching the benchmark portfolio. The P2P lending portfolio is still rather young, but I’m satisfied with the current trend of having 5 out of 450+ loans that are over 30 days late.

$10,000 Benchmark Portfolio. I put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the best low-cost, index ETFs from Vanguard and iShares. The portfolio was based loosely on a David Swensen model portfolio. Screenshot, click to enlarge:

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Realty Mogul Review: Fractional Investment Property Ownership, Hard Money Lending

rmlogoRealty Mogul is a new “crowdfunding” start-up that lets you invest in residential investment property for as little as $5,000. You either take a partial ownership position in a property, or you become a lender to (experienced) house flippers. The new thing here is that you can do it completely online with a few mouse clicks (no mortgage brokers, real estate agents, or tenants) and again that low minimum $5,000 investment. (Thanks to reader Johnson for the tip.)

Taking an equity ownership position means that you own a little slice of a single-family home or multi-unit complex while a professional does the buying, fixing up, renting out, and eventual selling. Realty Mogul only has done one deal like this so far (fully funded) and the intended timeframe is 5-7 years. You earn rent while the house hopefully appreciates in value, and cash out when the house sells.

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$10,000 Beat-the-Benchmark Experiment Update – May 2013

Here’s a condensed May 2013 update for my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

Executive summary. Six months have gone by since this experiment started, and the passive portfolio has ridden a hot stock market nearly the entire time. My speculative portfolio is catching back up a bit after my Apple holdings stumbled, while the P2P lending portfolio is still too young to make any firm conclusions. The details are below:

$10,000 Benchmark Portfolio. I put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the best low-cost, index ETFs from Vanguard and iShares. The portfolio was based loosely on a David Swensen model portfolio. Screenshot:

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$10,000 Benchmark Portfolio Update – April 2013

Here’s the April 2013 update for my benchmark portfolio, the first of three portfolios started on November 1st, 2012 as part of my Beat the Market Experiment:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

$10,000 Benchmark Portfolio as of April 1, 2013. My account is held at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the best low-cost, index ETFs from Vanguard and iShares. I funded it with $10,000 and bought all the ETFs required to be fully invested on 11/1/12. All trades were commission-free.

Here’s a screenshot from my account showing exact holdings and their market value on 3/31/13. With the current bull market, the benchmark portfolio gained nearly 10% in just 5 months.


(click to enlarge)

Here’s the asset allocation pie chart, tracked with a simple Google Docs spreadsheet:
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