Friday, November 10, 2017

Why I Am Pulling My Money Out of Lending Club and Prosper

I suppose I should keep you in suspense and make you read to the bottom of the article to find out why I am pulling my money out of Lending Club and Prosper, but I'll break the rules and tell you up front:  I am pulling my money out of Lending Club and Prosper because I'm losing money.

What Are Prosper and Lending Club?

Prosper and Lending Club are "Marketplace Lenders" or "Peer-to-Peer Lenders". They are businesses that use the internet to connect people with money with people who want to borrow money.  Unlike banks which risk their own assets, marketplace lenders risk investors money.  Prosper and Lending Club make money via origination fees and monthly processing fees.  

Prosper, in its current form, began in 2009; Lending Club started in 2006, and pretty much took its current form in 2008.  Both specialize in unsecured personal loans.

What Risks Do Investors Bear with Lending Club and Prosper?

As with any debt instrument, investors in Lending Club and Prosper bear the risk of default--they have no guarantee that the loan will be repaid.  They also bear a limited amount of interest rate risk--the risk that interest rates will rise in the future, leaving them with an investment that pays less than market rates, which could cause the value of the notes on the secondary market (where those who own Lending Club notes can sell them to others). 

The credit risk, the risk of default, is what is getting me (and other investors) now.  As my brother the car salesman said "I can make money lending money to any group of people, I just have to price it right".  In the money lending business, interest rates have to be high enough so that those who do pay cover those who don't.  

Investors in both Prosper and Lending Club had minimal earnings during the financial meltdown that started in 2008.  Defaults were high compared to interest rates and lenders did not earn much.  However, as the economy improved, so did earnings.  Mr. Money Mustache started investing in Lending Club in September, 2012. Like most investors, his initial returns were very high because it takes time for loans to default.  By September, 2015, when the first notes he purchased were fully mature, his return had dropped to 11.99%.  A year later, it was 10.18%.  By October, 2017, MMM's lifetime returns had dropped to 7.72$ and his experience was similar to mine--his monthly interest was being consumed by defaults.

Clearly right now, the pricing on those notes is too low--the people who are paying are not paying enough interest to cover the defaults. Lending Club investors have become victims of the law of supply and demand.  Two years ago investors complained that they had too much cash in their accounts--there were not enough notes in which to invest. In order to attract more borrowers, Lending Club lowered interest rates, because they believed investor returns did not have to be that high to attract enough investors.  Now they are beginning to raise them again because defaults are too  high--and right now, unemployment is low and overall, the economy is doing well.  If things take a turn for the worse, these unsecured loans will be some of the first people quit paying.  

What Am I Doing With the Money?

Most of it is going into a diversified portfolio of Vanguard mutual funds.  That is a sensible, low-cost investment that has stood the test of time.  It may not garner me clicks on my blog, but year in and year out, it gives results.  

I'm going to play with a little bit of it and buy some individual stocks via Robinhood, a commission-free broker.

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Friday, November 3, 2017

Book Review: Money Confidence

About the Book:

When it comes to money, hope is not a strategy. Toughen up, take action, and keep what's yours!

Have you, like many women, put off organizing your financial life? You know you want independence, you know you want to save, and you know you want a solid retirement. But if you're overwhelmed at the thought of where and how to begin, you're not alone. You may have been raised to defer to others in matters of money, or you may feel you simply lack the understanding of how to take on financial matters. Without the confidence they need, it's easy for women to find themselves in a situation where the only action they feel they can take is hoping that everything will turn out all right in the end. But planning for the future doesn't have to be this way.

Money Confidence is Crystal Oculee's authoritative and engaging reality check and call to action for women of all ages to take--or regain--control of their financial lives. The author shows why hope is not a financial strategy, and how, with the tools and information she provides, women can attain the independence, savings, and secure retirement they want.

The author cleverly employs metaphors from familiar fairy tales to illuminate and accentuate the book's serious message: Women need to toughen up; and they can and need to identify and overcome myths and mind-sets that place them at a disadvantage when it comes to dealing with their money and finding and working with financial advisers.

Oculee shows women how to communicate, be strong, ask questions, and reject advisers who don't take them seriously. Real-life scenarios of various women's experiences with money and advisers prove how women can get the confidence they need once they know what is holding them back. The author presents informative, down-to-earth explanations of common financial situations and specific financial products along with useful worksheets in a conversational and friendly tone with a good dose of sass. Women will find her valuable and easy-to-follow advice rings true.

My Comments:

Ever read a book you thought was good, but to which you had a hard time relating?  In Money Confidence Crystal Oculee uses fairy tales to illustrate how women allow others to control the most important thing in their lives--their money.  Many are waiting for Prince Charming to rescue them rather than taking things into their own hands and making things go their way.

Investments and the stock market have always fascinated me and I've generally handled the investments at my house, or at least been a well-informed partner when my husband handled them.  On the other hand, my intelligent competent mother never fooled with any of that.  She didn't have to ask Dad for money--the checkbook was in her purse to use as desired, but she didn't do the taxes or make the investment decisions.  Before it became apparent that my mother was going to be the first to die, my dad showed me where all the investment information was and told me that we were going to have to take care of Mom after he was gone (and of course Mom's last words to me were to take care of my dad).  

In any case this book reminds us that financial advisers are rarely Prince Charming, and that if one is doing something you don't understand and won't answer your questions, he probably isn't working in your best interest.  Oculee suggests that you CAN do it yourself and as one who has fired a financial planner who made more from my account that I did, I agree.  Another thing she points out is that while men are generally able to compartmentalize relationships and treat business and professional relationships as straightforward barters, women tend to get emotional.  While, in general, men don't feel bad about firing someone who isn't performing, women do.  We tend to be more concerned that the needs of others are being met than our own (yup, that's me too), and will make excuses for those who don't perform.

Another chapter discussed 401(k)s and the mistakes people make with them--both men and women.  Unlike the old-fashioned pension that was handled by professionals, individuals need to be aware of the investments in their 401(k)s, the amounts of their contributions and what to do when they leave a job.  

Oculee works as a financial advisor and she gives tips on how to hire one--the most important being to decide what you want, at least in my opinion.  I think that was part of the problem we had with ours--we wanted advice about things that weren't his strengths and didn't need what he was selling.

Finally Oculee spends some time talking about risk and then looking at the major investment choices.

If you are a women who has never taken command of her finances, this book is for you.  It is interesting, easy to read and filled with useful information.  Grade: B+

Disease Called Debt

Friday, October 27, 2017

Book Review: The Motley Fool Investment Guide

About the Book:

A completely revised and updated edition of an investing classic to help readers make sense of investing today, full of “solid information and advice for individual investors” (The Washington Post).

Today, anyone can be an informed investor, and once you learn to tune out the hype and focus on meaningful factors, you can beat the Street. The Motley Fool Investment Guide, completely revised and updated with clear and witty explanations, deciphers all the current information—from evaluating individual stocks to creating a diverse investment portfolio.

David and Tom Gardner have investing ideas for you, no matter how much time or money you have. This new edition of The Motley Fool Investment Guide is designed for today’s investor, sophisticate and novice alike, with the latest information on:
—Finding high-growth stocks that will beat the market over the long term
—Identifying volatile young companies that traditional valuation measures may miss
—Using online sources to locate untapped wellsprings of vital information

The Motley Fool rose to fame in the 1990s, based on its early recommendations of stocks such as, PayPal, eBay, and Starbucks. Now this revised edition is tailored to help investors tackle today’s market. “If you’ve been looking for a basic book on investing in the stock market, this is it...The Gardners help empower the amateur investor with tools and strategies to beat the pros” (Chicago Tribune).

My Comments:

Conventional wisdom right now is that the best investment strategy for the average person is to invest in a diversified portfolio of  low cost index mutual funds or ETFs.  Studies show that few professional money managers are able to consistently beat the averages so just buying those averages puts you ahead of them.  

Rather than espousing conventional wisdom, The Motley Fool Investment Guide says that you can be better than average by investing in individual stocks as opposed to mutual funds/ETFs.  Their basic thesis is that fund managers are playing with too much money so that when they buy into a company it affects the price of the stock; and the same when they sell.  It is the opinion of the authors that individual investors, even if they do not possess the expertise that some of the professionals do, are able to achieve better than average results if they gather the proper information, analyze it and purchase stocks that are likely to produce better than average gains.

The book is easy to read and it describes where to get information on public companies, how to interpret it and what qualities to seek.  

While The Motley Fool Investment Guide gives a lot of good information, it is also a not-so-subtle sales pitch for the premium services offered via Motley Fool's website.  Those services start at $99 per year.  Still unlike some other books that seeks subscribers for websites, The Motley Fool Investment Guide tells you how to do it yourself--if you have the time, knowledge and resources.  It makes outsourcing the job sound very attractive. 

Still if you want to learn how to pick stocks, The Motley Fool Investment Guide is a good start. 

I'd like to that the publisher for making a review copy available via NetGalley. Grade:  B+
Disease Called Debt