The return on my portfolio with LendingClub – my choice was mostly low-grade notes – steadily dropped all the way down to 5.88% over the last year and a half. Until we finally run into this:
As of 11/7/2017, F & G grade Notes are not available for purchase by investors.
noticed an increase in prepayment and delinquency rate in F and G grade Notes
Seems like the 20+% APY party came to an end. Even without any major event or recession in sight yet. My guess would be that with a spike in demand, LendingClub had to loosen up some criteria and let in a bunch of borrowers they wouldn’t and shouldn’t have otherwise, so now all of us are paying the price. Still might get much worse when the economy starts to tank.
Short-term: it means nothing. The sky isn’t falling and my adjusted return rate over 3 years is still 13.77%. And MMM et al are still collecting a sweet chunk of referral change for sending the general interwebs population in that direction.
Long-term: will see. Short of catastrophic operational disruption (which I don’t think is the case here), I expect things to move along the same way in this established business (ok, so the startup tag on this post looks pretty ridiculous by now, of course). The threat I’m still concerned about is some economic event which may cause people to default much more. But what will take the biggest hit in that case – equities, funds, real estate or peer-to-peer lending – is anyone’s guess.
So I painfully moved to cash, bonds, money market and other assets throughout 2015. It was a very lonely and depressing experience, missing out on all those FBIOX gains (I know, right?) But I kept asking myself, do I really believe that all those S&P 500 big old dudes, the General Electrics, the General Motors, IBMs, and Exxons. Do they make twice more money than 5 years ago? Hardly. So why all the craze? We don’t have a noticeable inflation, at least not in the consumer, non-real-estate space. S&P 500 is still almost 2x over 2010, give or take, even after the ongoing correction early in the year. There are no fundamental reasons for these companies to jump 2x in their market cap. Meaning, there might have been some other, non-fundamental reasons – perhaps more speculative in nature – and now we still have some way to go…
Just a data point – started on Lending Club in October 2013. Now up to 258 notes, adjusted return rate is down to 13.73% from twenties a year ago, but that was expected. I have an aggressive approach, only invest in E-F-G-grade minus some urban legends like never loan money to people in Nevada : )
From those notes, 13 are in default/charge off, 42 have been fully paid – assuming only pre-payment at this point (2 years), and I wonder if it hurts the APY? Since those people paid early, do I get the interest for 3 or 5 years? Guess not. But again, the biggest problem so far is the lack of liquidity – if I had a need for that money, it would not be easy to get it back before the 3/5 year term.
2 years into it, seems like a good way to make 10%+ on your investment. No idea how this will hold up in case of a downturn, people getting fired and defaulting on their loans. With SPX on track to return near a big fat 0% for the entire year 2015, LC looks like a good place to park some cash. However, a sales/support guy from LC called me once out of the blue, and started throwing some unexpected trivia and advice at me like not investing more than 10% of your portfolio in them. Yes, that was their sales person, and right at the time when I was considering moving more money into that account.
More updates will follow on this page.
Some stats from the last few months: started on Lending Club in October 2013. Now up to 152 notes in various stages of maturity – overall, of course still kind of early: the oldest notes I have are only 8 months old. So far the Adjusted Net Annualized Return is steadily over 20%, the current number is 20.52%. Very few notes are late. Of course, I expect late and charge-off rates to increase as the notes mature, but so far it’s surprisingly steady, knock on wood.
The biggest catch: this is not very liquid at all. If a decent APY holds, you get your money back in a few years, there is no practical way to just get out. There is a trading platform where you can in theory dump the notes in case you need your money back, but I haven’t tried it.
With all ongoing celebration of the shutdown and default, complemented by the local absurdity like BART and AC Transit strikes, it seems to be not the best moment to dump more of that hard-earned cash into the stock market – unless you are magically good at day trading, that is. So I finally decided to try out the Lending Club. Much has been said about them backed by Google Ventures, etc so there is plenty of background info elsewhere.
The biggest surprise, at least for today, was that there are only about 400 notes that show up in the unfiltered search. What’s worse, only 10% are lower-grade, which makes any kind of coherent filtering on the current set completely useless – there just aren’t enough notes to go around. Also, 40 lower-grade notes don’t exactly amount to a diverse portfolio, which becomes a bigger problem the lower in the grade you go. Since they claim 5000 loans listed in a week, apparently you have to fish daily for decent notes and add them as they come out.
Those new notes seem to be added daily in batches at 6am, 10am, 2pm and 6pm Pacific, with the biggest batch in the morning, and a combination of automated and manual trading quickly picks up the good ones. So you either have to script it, or check it around 6am precisely to have access to the best ones.
There is another pretty big and fundamental catch with investing there which I will cover in the next posts as I get data, so stay tuned!