After posting my Lending Club investment strategy and returns for over a year now, I thought today was as good as any to post a quick summary and track my net annual return volatility.
Summary
- Outperforming Lending Club’s benchmark index of 9.7% by ~4.5%.
- Loan payments generate ~$250/month of cash for reinvestment.
- Defaults: 2 loans have defaulted and at least 2-3 more expected in the near future.
- Corrective Actions & Preventative Actions: defaults will crush your NAR.
- Winding down monthly deposits to lower amount.
Outperforming the Benchmark Index
Outperforming any financial benchmark in a single year is worth celebrating as any mutual fund or hedge fund manager will tell you, so I’m fairly happy with my investment return of ~14.1% NAR thus far.
It hasn’t been easy and I’ve burned more than my fair share of midnight oil filtering and reviewing each loan application one by one, but filtering the wheat from the chaff appears to have been worth the effort.
Reinvesting Principal & Interest
Even though my portfolio is in the low $8000 ballpark, it still generates a decent amount of cash to reinvest.
Allowing these funds to sit idle would hurt my NAR over the long haul, and since I have no interest in withdrawing funds or selling them on the FolioFN platform, it’s best to keep the high interest steamroller moving forward.
Defaults
Unfortunately for me, I don’t have a working crystal ball. Therefore, I can’t identify with a 100% degree of certainty that one borrower will repay their loan while a second borrower will default immediately after gaining access to their cash. Few investments, if any, work this way, and if they do, they’re probably FDIC insured.
So while some defaults are expected, I do as much forward thinking as possible to anticipate future potholes in the borrower’s path that might cause late payments, bankruptcy filings, or charge offs. Like any inexact science, as P2P lending appears to be, persistence and quickly adapting to new developments makes the difference between success and mediocrity.
Corrective Actions & Preventative Actions
Rule #1 of all of my investment theses is not to lose money, so now that the defaults and charge offs are beginning to pile up, it’s in my interest to review my strategy. That means reviewing what went wrong, why the borrowers chose to default (e.g. declaring bankruptcy making <10% of scheduled payments) versus couldn’t help but default (e.g. lost their job), and how best to filter these borrowers out in the future.
As of now, the only concrete conclusions I’ve came up with is to:
- Avoid the lower income borrowers (< $50,000) with cash flow crunch potential.
- Avoid those who don’t answer the Q&A section fully & completely.
- Avoid the >1 delinquency crowd.
- Avoid the high revolving credit balance crowd ($25,000+) where bankruptcy is a painful but profitable endeavor.
I’m sure this isn’t all metrics or warning signs to avoid, but considering that Lending Club has 250 to 500 loan applications in their database at any given day, I can afford to be highly selective in where my funds are invested.
Winding Down New Deposits
My investments at Lending Club began as a pilot scale experiment to see if my strategy is effective, if the time invested in an active management strategy was worth it, and if I had the endurance to keep reinvesting my profits (e.g. avoiding idle cash) over a time period of several years.
Now that my balance is in the $8000 range, I’m reasonably comfortable with saying that’s a healthy amount to accomplish my goals. This doesn’t mean I won’t be adding new funds, it just means I’ll be reducing them for the time being while reinvesting existing funds as borrowers repay their loans.
Please note that just because I’m reducing my deposits, members of my Lending Club investment club should not be affected as I will continue investing in 16-20 notes per month.
