5 Ways to Lose Money with Peer-to-Peer Lending

About a year ago I began researching investments; trying to determine how best to put my inheritance to work so as to contribute to long-term financial security for my family.  My husband and I have been investing in mutual funds regularly since we married, both through our retirement plans and independently.  However, we had been on auto-pilot for years and since we now had a large sum to invest, I wanted to make sure we were doing the right thing.  During the course of my research I learned about peer-to-peer lending via Lending Club and decided to invest a small amount of money to "kick the tires".  I decided I liked what I found and I have since that time invested about 5% of our investable assets in Lending Club and its main competitor, Prosper.  Over the last year I have learned that returns over 5% per Annam are not hard to get.  I have also learned some ways to lose money, and of course, I learned some of them the hard way.  So you don't have to learn the hard way, here are some ways to lose money with peer-to-peer lending:

Don't Invest Enough Money

That sounds counter-intuitive--the more I invest, the more I can lose, right?  Yes, and no.  Just as investing in a broad index based mutual fund means that you will not hit a home run, nor will you generally strike out, investing in just a few peer-to-peer notes means that you will either hit a home run, or strike out.  Buying a lot of them means you will buy the average.  Peer-to-peer notes are unsecured personal loans; like credit cards they require no collateral.  Generally speaking the amounts owed are low enough that collecting via the court system is not cost-effective.  A certain level of defaults is a given, and those defaults are the reason for the seemingly high interest rates.  If you invest in only a handful of notes, be they large or small, you are more likely to end up with a return that is extraordinarily high or low than  you are if you purchase more than one hundred notes.  

Let Cash Accumulate

Used with Permission

Unlike many other investments, peer-to-peer lending returns both principal and interest to you daily.  That is a good thing if you want to maintain your options or if you want to withdraw money for specific needs at specific times.  Last month my Lending Club account paid me $608.70 in principal and $201.37 in interest. If I took no steps to reinvest that money, it would be sitting there earning nothing.  You can set your Lending Club or Prosper account to reinvest the payouts automatically, either through their platform (at no cost) or through some third-party tools like Blue Vestment or Lending Robot (which charge fees).  If you do not choose to use those tools, you need to log in regularly to reinvest your returns.

Pay Too Much Premium for Resale Notes

Both Lending Club and Prosper allow investors to sell the notes they have purchased via trading platforms.  While Lending Club and Prosper set the original price and interest rates of the notes, the resale market is one of supply and demand.  I can ask any price for any note I own, and you can choose to pay it, or not.  The resale platform will show a potential buyer the asking price of the note, the amount of principal outstanding, the interest rate, the number of payments left on the loan and the debtor's FICO history.  It also shows a yield to maturity, which takes into account the service fee by Lending Club as well as any premium being sought by the seller.  Generally speaking, the highest default rate on these loans is within the first year.  If a borrower has made all payments on time for a year, the chance of default goes way down.  Given that fact, many investors like to search the resale platform for high interest notes that are about a year old and which have perfect payment records.  I can buy one right now that has a yield to maturity of 22.51%.  At one time I may have bought that loan, figuring that if I got 22.51%, what did I care if the seller made something too.  However, I learned that this is a way to lose money because that loan is offered at a 4.64% mark-up.  The current principal and interest balance on that note is $22.63.  The asking price is $23.68.  Interest the next couple of months will be $0.48 per month.  That means it will take more than two months to break even.  Since borrowers can repay the loans anytime without penalty and because Lending Club collects 1% of any payment as a fee, it will probably take at least four months before you would be in the black if the borrower paid the loan early.  If the borrower has improved his/her credit rating since taking out the loan, it is likely they will try to get a different loan at a lower interest rate.  In short, the higher the premium you are paying, the greater the chance that an early payoff could leave you in the red rather than in the black. 

Invest in Late Notes

Lending Club allows investors to sell notes that are overdue; Prosper does not.  Of course, in order to get someone to buy an overdue note, you have to discount it.  Some bloggers have claimed to be able to make money purchasing these notes at a discount.  While some (or many) go bad, they get enough winners to make it worthwhile.  If you are willing to study the odds, crunch the numbers and spend enough time reviewing the notes that are for sale, you may be able to make some money following this strategy, just as some stock traders are able to make money trading options on margin.  For most people, the greater chance is that you will lose money.  Play if you will with a little bit of money, but consider this to be gambling, not investing.

Sell Your Late Notes for too Little

Lending Club publishes statistics showing the percent of notes that end up going bad at each level of lateness.  Generally sophisticated buyers will only purchase notes discounted that much or more.  Some investors are more comfortable unloading late notes, and will discount them until they sell.  If it helps you sleep better at night knowing that you may have let a note go too cheaply, but at least you won't lose it all, then go for it.  However, statistically speaking, in general you are better off waiting out the defaults if you are not able to sell the late notes at a discount that doesn't exceed the expected default rate.  

Conclusion

Peer-to-peer lending is, from what I can see, a profitable way to invest money, but it is not risk-free.  Like most other investments, the more risk you are willing to take, the more money it is possible to make, but the bigger the chance you will lose money.  Consider whether you are willing to put the time into becoming an expert on statistics and credit models.  If you are not, buy the platform and let the law of averages work for you.  

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and Femme Frugality*

Retirement Is More Fun if You Feel Good

One thing you don't usually think of when considering retirement planning is physical fitness.  However, in general, those in better physical condition who continue to exercise to the extent possible, fare better physically in their later years than do inactive people.  Pre-retirement years are a good time to get into a fitness routine that can be maintained long-term.  This giveaway has some things that may help.  I'm going to participate and if you are a blogger, you can play too!

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12 Things an Executor Should Do

The executor/executrix is the person charged with acting in the place of someone who died.  It is this person's job to make sure the decedent's bills are paid and that his/her financial affairs are wrapped up, and once creditors have been paid, it is the executor or executrix's job to see that the assets are distributed according to the decedent's will.  I don't know about other states, but in Louisiana, if a person dies without a will, the person who does that job is called an administrator/administratrix but for the sake of simplicity, I will use the term "executor/trix" throughout this article.  If you are appointed executor/trix here are some steps to follow:

Discuss the job pre-need:

Hopefully you will not be surprised you were given this job.  Hopefully the person who so appointed you asked your permission before doing so.  Ask this person to prepare a list of assets and accounts for you.  If not given to you, you should know where in the house to find it.  My dad kept his on a computer and in a fireproof box.  This list should include:

• Bank Accounts:  At least the names of the bank(s); preferably account numbers as well;
• Investment Accounts:  Account numbers, holders, websites, passwords.  Everything the executor/trix needs to find all the money
• List of Real Estate Holdings:  If there is rental property, a copy of all leases, or at the least, the amount of rent due, and from whom; or if a mortgage is held, the name of the debtor, amount due and date due; 
• List of all regular bills:  This is particularly important if they are paid automatically electronically.  It allows the executor to quickly shut off unneeded things (like NetFlix) while making sure the power bill is paid.
• List of known debts:  Creditors have first rights to an estate.  Mortgages should be on this list as well as any other long-term debt.
• Insurance Agent:  It is going to take time to wrap things up and the decedent's homeowner's insurance can be kept in effect during that time.  If there is life insurance, the executor needs to know about it so it can be claimed.  
• Funeral/Burial Choices:  Especially if there may be disagreement among the heirs about the type, location or price of the funeral, having in writing what someone wants can reduce contention
• Digital Information:  Having access to email and/or facebook accounts makes it easy to notify those important to the decedent about his/her death.  However the decedent needs to realize that giving out those passwords may give out secrets s/he would rather keep.  However, people should give serious consideration to giving the executor/trix access to photo accounts such as Google Photos, Flikr, or Amazon.
• Business Information: If the person owns a business, with employees, those employees will need to be paid.  If the business is a sole-proprietorship (not a corporation or LLC), the business will die with the owner, even if the name and everything else is sold or passed on to heirs.  You need to know where to access any payroll records and tax records, as well as any information needed to keep the business running (if possible) until plans can be made for its future: 
• Location of last year's tax return or name of tax preparer.  As executor/trix you will be responsible for filing the decedent's final tax return.  Having the prior return helps.
• If the will contains any surprises, an explanation:  I think most children expect to share equally in their parents' estate with their siblings.  If one sibling for some reason is getting substantially more or substantially less than others, a written explanation from the parent may help avoid a court fight (but don't count on it).

Take a Deep Breath

There is very little that has do be done immediately, other than the funeral.  Get through that, and allow yourself to mourn.

Notify Those Who Need to Know:

If the decedent was receiving any kind of pension or government aid, those agencies need to be notified of the death.  While the funeral home may notify Social Security, you need to cut off any military pension, VA benefits, or corporate pension. If the decedent had life insurance, a claim must be made. If the decedent had minor children, Social Security should be notified so benefits can be paid to the children.  

Gather the Paper:

You are going to need a Death Certificate (the funeral home will order these, and you only need a few; most banks etc. today will take a scanned copy), and a list of assets and a copy of the will.

Hire an Attorney

Unless you have no money and the decedent had no money, hiring an attorney is the smart thing to do.  Yes, you can probably find all the forms you need online or at the library at the local courthouse, but this is one of those cases where it can be expensive to fix something that could easily have been done right in the first place had you hired the right person.  Give some thought to the expected size of the estate, the expected complexity of the estate and the expected problems (or hopefully lack thereof) with the heirs before hiring an attorney.  You don't need the guy in the corner office of a fancy firm in a high-rise building to handle passing a house and bank account from the surviving parent to siblings who get along.  However, if the will includes trusts, ongoing business interests, and multiple families, and substantial assets, that may be the person to hire.  Call the local bar association or use Google to find local attorneys who specialize in estates.  The outside of their office should give you some clue about where they rank fee-wise.  Most will give you a quote after the initial consultation (which should be complimentary) and will give you a general idea of what will happen and when it will happen.  

Open a Bank Account for the Estate

The attorney will likely advise you to open a bank account for the estate.  While Louisiana is different, in most states there is an initial round of paperwork followed by several months of probate--a waiting period during which creditors can make their claim.  After the initial round of paperwork, you will be given a document to take the the bank to claim the money for the estate.  That money cannot be distributed to the heirs at this point (unless it is a pay on death account) but can be used to pay the bills of the decedent or the expenses of the estate (like keeping the lights on in the house).  This account is also where you deposit money owed to the decedent or the estate (like rent collected from tenants).  

Manage the Affairs of the Decedent

You are now authorized to financially act as the decedent would.  You can collect debts and you have to pay bills.  You have a fiduciary duty to act in the best interest of the estate so as to maximize recovery for creditors and to provide as much as you can to the heirs.  If the house needs to be sold, you have to hire the real estate agent or otherwise arrange for it to be sold. If one of the heirs wants it and it was not specifically willed to that person, you need to figure out how to make the other heirs whole, whether is by that person paying the estate for other shares or by that person taking less of the pot--or whatever other way the heirs agree.  

Communicate with the Heirs Early and Often

Hopefully, you will be in a position shortly after the funeral to get a basic handle on the decedant's financial state.  You may not know it down to the penny, but you should be able to say "Dad had money in the bank, but the medical bills are really high and they just keep coming" or "Mom had a reverse mortgage on the house and almost no money in the bank" or "It looks like we are each going to get about $$.  Send everyone an email every month or two about the status of things; how much money did you spend, how long will it be etc.  

Talk to the Heirs About the "Stuff"

While scanners mean that we don't have to fight
over old family photos anymore
there may be something that everyone wants.

Most people who die have a house full of used furniture.  In the grand scheme of things, used furniture isn't worth much, and no creditor cares what you do with it.  However, heirs often do.  Get them together as soon as possible (maybe around the time of the funeral) and formulate a plan for dividing the things.  If it is possible and/or feasible to leave the house set up for a few months, and everyone agrees to leave everything alone for that time, it may be easier to deal with when emotions aren't as high. On the other hand, if the house is a rental, or if it needs to be sold to pay bills, or if the heirs are afraid that someone will take the wrong thing if it is left in the house, then dividing things up shortly after the funeral, before folks go back to "real life" may be easier.  Find out if the heirs are set on wresting every possible nickle from the estate, or if they want to take the easy money (bank accounts) and send the excess stuff to Goodwill. Try to keep everyone on good terms when it comes to dividing up what cannot be split.

Follow the Lawyer's Instructions 

Hopefully you picked a lawyer who has done this before and can tell you what to do to gather the assets.  On the other hand, you can ask the attorney to do it for you.  It all comes down to the amount of trouble involved, and how much you want to pay the lawyer vs how much you'd rather do yourself.  

Complete the Final Tax Return

You can do this yourself, or use money from the estate to hire someone to do it for you.  

Distribute the Assets

Hopefully this is no harder than writing a check.  The reality is, when heirs fight over an estate, the only winners are the lawyers.

Have you ever served as an executor/executrix?  Do you have any advice for those who may get this job in the future?

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and Debt Free Divas*

New Financial Products: Loyal3

I don't know about you, but Amazon.com is one of my favorite places to spend money. It sure would be nice if I could get a piece of their action.  Oh, wait, I can get a piece of their action, I can buy stock in the company.

Conventional wisdom since I've been investing has been that ordinary investors should put their money into mutual funds and buy the market rather than purchasing individual stocks.  That advice is based on three factors:

• Many small investors lack the time, desire and/or know-how to adequately investigate the value of a company and therefore could purchase shares at the wrong price point or hold them when they should sell;
• Investments should be diversified, and small investors are unable to invest in enough different stocks to be diversified and
• The sales commissions charged by traditional brokers took far too large a piece of a small investor's investment.

A new website, Loyal 3, seeks to address the last two items.  Loyal 3 sells stock in 64 different companies to individual investors You can purchase fractional share and therefore can invest as little as $10 in each company.  More importantly, Loyal 3 does not charge to buy or sell stocks. If you want to invest $100 in Coca-Cola, you can do that, and you will pay no sales commission.  

Is there a catch?

Yes, sort of.  Loyal 3 does what they call "batch trading".  If you call your full-service broker and tell him to sell your stock in xyz, he'll do so almost immediately. If you tell him to buy PDQ, it is yours.  Loyal 3 waits, and places one order per day for the stock.  If you are trying to market time, Loyal 3 is not for you.  Also, they only offer 64 stocks, so if you want something else, you have to go elsewhere. 

Have I tried it?

Unlike most of the other products on which I have reported, I have not tried Loyal 3.  I am planning to open accounts for my kids and my nephew and to give them stock for Christmas next year.  I'll pick something like Disney or McDonald's and couple the gift of stock with some merchandise.  The low initial investment ($10) and lack of sales commissions make that possible.  

Conclusion:

I think conventional wisdom is probably right to discourage ordinary investors from putting too much money into individual stocks.  However, I find individual stocks far more interesting than mutual funds.  While I would stick with mutual funds for the majority of my investing, I think Loyal3 offers small investors the chance to invest a little fun money with companies they find interesting.

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and Shoeaholic No More*

Book Review: Rich Dad Poor Dad

 

Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!

About the Book:

Rich Dad Poor Dad, the #1 Personal Finance book of all time, tells the story of Robert Kiyosaki and his two dads—his real father and the father of his best friend, his rich dad—and the ways in which both men shaped his thoughts about money and investing. The book explodes the myth that you need to earn a high income to be rich and explains the difference between working for money and having your money work for you.

My Comments:

If you ask most people what the difference is between the rich and the not-rich, you'll hear about education and getting a good job with good benefits. In Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!, Robert Kiyosaki suggests that it is more than that.  The rich have mastered the arts of deferred gratification and risk-taking.  While Kiyosaki's real father had a graduate degree and worked in a professional job, and had a decent (though not luxurious) standard of living while working, he had few assets, few things that would produce income for him.  Kiyosaki's other "Dad" lived in a smaller house, and did not have a good education. However, he had assets and he had people working for him.

Reading this book makes you think that anyone could become rich if only...and maybe they could.  Maybe my attitute is holding me back (though I have more assets than many do,so compare to them I am rich..) but as the book also says, it is easier to be broke at 30 than at 50, and since I'm closer to 50 than 30...

The book is an easy read and does give some ideas that most people could try, so, if you want to get rich, and are willing to put in the the work, good luck!

I'd like to thank the publisher for making a review copy available via NetGalley.  Grade:  B

2015: Quarter 2 Report

Quarterly reports seem to be the thing to do for financial bloggers, so I'll take my turn.

This quarter we withdrew money from savings to pay my daughter's Catholic school tuition and to renovate our bathrooms.  Our investment performance has been lackluster but we have managed to save some money.  Here is how things went this quarter.

HD Vest:

This is the account we have with a financial planner.  It is invested in a diverse portfolio of mutual funds.  We did not add to it this quarter.  The account lost 6/10 of 1% between April 3 and July 3.  To put that in perspective, the S&P 500  is down 3/10 of 1%. .

My 401(k):

This is a major portion of our assets and is invested in a diverse mutual fund portfolio.  About 35% of it is in a bond fund, 65% in four different stock funds. This quarter I saved 16% of my income and the firm gave me 5% of my pay.  I've played with several retirement calculators that said we do not need to be saving that much for retirement, and since we are having to dip into savings for tuition, we decided to cut back to 6% of my pay going forward.  This quarter, the account lost about 1%. 

My husband's 401(k)

My husband saves 5% of his pay, and his company gives him 3%.  It is a relatively small account and is invested in a growth stock mutual fund.  Fees are high; choices are few.  We lost a small amount on this.

Our Roth IRAs:

These are invested in Vanguard's 500 Index Admiral Fund.  They are about even.  Share prices is down slightly this quarter but we got a dividend that makes up for it.   We are taking $1000 per month from our savings account and adding it to these accounts, with the goal of maxing them out this year and next year.  

Lending Club:

We have not added any new money to this account.  We have also suffered our first default.  Lending Club shows my adjusted (hypothetically, using their estimates of loss) net annualized return to be 10.49% for the lifetime of the account.  XIRR is considered by many to be the most accurate way of accounting for money into and out of an account like this, along with the cash drag that happens because loans are always being paid off and it can take time to re-invest the proceeds.  This XIRR calculator shows my annualized return to be 10.38% using actual values (this assumes that all loans not currently charged off will be paid in full) and 7.88% assuming that the loans currently late will be written off at a rate that has been average at Lending Club.  Another way to look at it is that the adjusted value of the account has increased 2.3% over the last three months. Annualized, that would be about 9.2% per year.  

Prosper:

We have not added any new money to this account either.  Prosper is showing my annualized return to be 13.01%  Unlike Lending Club, Prosper does not estimate losses for you.  The XIRR calculator shows my returns to be 12.2% assuming all notes pay.  Assuming none that are late pay, the XIRR decreases to 8.62 %.  Over the last three months the value of the account has increased by 3.2% without accounting for late notes, or, if you assume that I will lose all of them, it has increased by 1.7%.  Annualized, that means my returns are somewhere between 6.9% and 12.8%.  We suffered our first default this month, and I suspect more are coming soon.  Prosper advises you not to get comfortable with your returns until your notes are "seasoned", more than ten months old.  That won't be until September.  

Motif Investing:

To recap, I transferred $5,000 to this account in March.  It is now worth $4970.77.  Since then I have invested in the following motifs:

Things I Like:  This was self-designed. On April 15, I invested $1000.00.  As of July 3, it is worth $1008.77, and, as of this moment, is beating the S&P 500.  I've also gotten $2.57 in dividends.  

Buyback Leaders:  Stocks in companies that are buying back their stock.  Purchased $1000 worth on May 4.  Now worth $1000.34. I have received $1.23 in dividends.  Currently beating the S&P.

Cyber Security:  Anti-hacking stocks.  Bought $1000 on 6/2.  Now worth $989.84.  Still beating the S&P.  

High Yield Dividends:  Bought $1000 on 3/20.  Now worth $970.49.  The S&P is doing better than this motif, though the share prices don't tell the whole story, as $9.73 in dividends have been received.  

Online Gaming World:  Stocks of companies involved in Multi-Player On Line Role Playing Games.  Bought $500 worth on May 11.  Now worth $520.79.  Yes, that beats the S&P 500.

Online Video:  Bought $250 on 5/27.  Now worth $231.60.  The S&P did better.

I still have a little less than $250 in cash in this account.  Since the minumum amount to invest is $250, once my dividends make that amount reach $250, I'll start looking for another Motif of the Week that looks interesting.  

Generally speaking, it costs a $9.95 sales fee to purchase a motif (a group of stocks).  However, it is not uncommon for them to run a promotion of a "Motif of the Week" for which they waive the sales fee.  All these motifs, except "Things I Like" are Motifs of the Week.

If you are interested in investing with Motif, use this link; we both get $100 out of the deal.  

Kickfurther:

You can read about Kickfurther here and here.  In short, I invested $300 in six loans.  One has been paid back completely, plus 8% interest.  Two have made partial payments.  If you value the unpaid loans (which are not overdue) at $50.00 each, and plug all this into the XIRR calculator, right now I have annualized returns of 7.11%.  The main problem I see with this site right now is a lack of investing opportunities.  The returns seem to be great and the risk seems less than with unsecured personal loans.  We shall see.  If you'd like to invest, use my affilate link and you get $5.00 and I may win more.

Conclusion: 

The stock market was down this quarter and our returns showed it.  I'm glad I found Lending Club and Prosper; they are pretty much the only things that are making money for us, though I will say I've read a little more about Kickfurther and gotten some returns and will be putting more money towards it.

Right now my Prosper returns are higher than my Lending Club returns.  Part of that is because I specifically set up a portion of my Lending Club account to have high cash turnover.  I bought resale notes, some of them rather small, in an attempt to diversify my account when it was new and low.  I have continued to buy resale notes partly to limit the risk (most loans that are going to go bad do so in the first year) and partly to keep monthy payments high.  This has the advantage of making it possible for me to easily extract more money from the account if I need it for other things.  It has the disadvantage of lowering yield as the service fee eats up a bigger percent of your interest at the end of the loan as opposed to the beginning of the loan.

We still haven't decided whether or not to fire the financial advisor.  The returns are neither so good or so bad as to make the decision a no-brainer but we are definitely leaning toward going it alone .