Returns on My Prosper Account

I have money invested with two different Peer-to-Peer lending companies, Lending Club and Prosper.  My Lending Club returns were discussed in an earlier post, which also described the concept of Peer-to-Peer Lending. Now I am reviewing my Prosper account.

Prosper versus Lending Club: My Results

Prosper and Lending Club are both "marketplace" or "peer-to-peer" lenders.  Both allow people who want to borrow money to apply online.  Both allow small investors to buy portions of many loans and both make their money on application fees and servicing fees.  As an investor it is important to look at the differences between the companies before investing your money.  In the battle of Lending Club versus Prosper, who wins?

Portfolio Update July 1

Wow, half the year has gone.  It is time to take a look at our investment portfolio, analyze it and decide if any changes are needed.

Vanguard:

We have Roth IRAs invested in Vanguard's S&P 500 index fund, plus regular IRAs and a taxable account that we tranferred to Vanguard from a financial advisor.  The advisor had us in a large number of mutual funds, and the cost to sell each one is $20 per account; therefore we have not been in a hurry to sell them.  We did move out of the worst performing ones late last year and we just analyzed what was left. We have several funds that are significantly underperforming their associated index and if that continues at the end of the year, they will be on the chopping block.  After anaylzing everything we did decide we were overexposed in US stocks and so we sold some of our S&P 500  fund and bought Vanguard's index funds for international bonds and for international stocks.  Overall, these accounts are up 5.23% this year. 

One of the things a lot of people track is the income generated by their portfolio.  So far this year, this portfolio has generated $2788 in dividends and capital gains.  I expect that amount to rise as we have increased the bond percentage in our portfolio from about 25% to about 30%.  My husband is 60 and I am 55; we are getting to the point that we need more stability and income in our portofolio.

My 401(k):

My 401K was invested 25% in MFS Agressive Growth Allocation Fund A, 25% in Franklin Total Return Fund A and 25% in Janus Triton, with 12.5% each in MFS Growth Fund-A and Delaware US Growth Fund A.  For the first six months of the year, the YDT performance was 1.77% which is lower than my other investments.  

I decided to re-allocate and now I have 38% MFS Government Securities Fund A, 20% Janus Triton, 19% Oppenheimer International Small Mid Co A, 11% Delaware US Growth Fund A and 12% Pioneer Fundamental Growth Fund A

For the first six months of the year, my dividends, capital gains and other earnings (as opposed to increases in share value) totalled $1,647.85.  I expect that to increase in the next six months due to the increased bond holdings.

Motif Investing:

This was a toy for me to play with.  Motif Investing allows you to invest in up to 30 different companies at one time, for one fee.  You can either assemble your own group (Motif) or buy one of theirs.  Once you own the stocks, you can sell them one at a time, or you can sell the whole motif for only one fee.  The motif I developed isn't doing very well--my $1000 is down to $960, though I have collected some dividends.  Overall, I invested $7,000.  My portfolio is worth $7223.69 and over the last few months I have transferred $320 in dividend income to Loyal3.  So far in 2016, I have earned $105.31 in dividends at Motif, for a yearly yield of about 3%.  If you want to invest via Motif, use this link and we both get $100.

Loyal3:

I started investing with Loyal3 as an incentive to bring lunch from home rather than to buy it from the lunch counter in my building.  I got tired of that, but have used the account as a place to invest the dividends I got from Motif.  Through Loyal3, which is a no-fee stockbroker, I own stock in AMC Theaters, Alibaba, Disney, Hershey, Intel, Kohls, Target, TimeWarner, Unilever and VF Corp.  So far, I've broken even; AMC, Hershey, Intel and Unilever are up, the others are down.  My $630 investment has garnered me $5.91 in dividends for an annual yield of about 2%.

Prosper:

So far this year we added $300 in new money to this account and we transferred $550 from Kickfurther to Prosper.  Our XIRR return on this account is 11.48%. Prosper shows my seasoned returns to be $12.85%.

Lending Club:

I'm not liking all the things I've been reading about the corporate troubles Lending Club has so I haven't wanted to invest more money with them.  I haven't pulled any out, but I'm thinking about it.  Right now my account value is $19,791.89 and my adjusted account value (Lending Club computes a hypothetical value based on the number of late notes and how late they are) of $19,173.84.  The increase is only $313 so far this year.

Kickfurther:  

Kickfurther says my profit since the inception of the accout is $382.17.  However, they have yet to subtract anything from that for bad debts.  They paid me for the first four bad deals I had, in the amount of about $175.  Right now I have about $260 in deals that aren't paying.  Some I think have some recovery potential--KF has indicated that it has the inventory and I personally think the inventory will sell at some price (bamboo kitchen drawer organizers and silk comforters); the others I suspect won't give us much if anything, but hopefully I'm wrong.  Bottom line, for in investment of about $2500 made in dribs and drabs, mostly from June-Dec 2015, there is a real possibility that the value of the investment is a $20-50 loss, if you consider the $175 that KF refunded me to be a loss, along with my predicted loss from the deals I have that aren't paying.  The real questioin is how much value can KF get out of the bad deals; and at this time we haven't seen evidence they can get any.  However, they have a legal team working on it now. I think Kickfurther has potential; I'm just not sure the pricing is right on it.  If you want to try it, use my link and you get $5.00 toward your first investment.  

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and One More Broke Twenty-Something* http://diseasecalleddebt.com/extreme-saving-no-new-clothes/ 1. How We Avoided Buying New Clothes for a Whole Year http://brokegirlrich.com/the-little-costs-of-friendship/ 2. The Little Costs of Friendship http://familymoneyplan.com/interview-brokegirlrich/ 3. Behind the Screen Interview #7

Update of My Prosper Account

Last week I took a look at my Lending Club account and how it was doing.  This week I'll examine my Prosper account.  For those who don't know, both Prosper and Lending Club are Peer to Peer Lenders.  They take applications from those who want to borrow money, review the applications and offer loans to those who qualify.  The interest rate offered depends on the credit-worthiness of the applicant and the risk factors associated with the loan.  Once that is determined, the loan is offered to investors who can purchase as little as $25 worth of the loan, either by personally reviewing data about the loan or by setting the computer to automatically invest any available funds in loans that meet criteria you have set.

Here is a screenshot of my Prosper dashboard.  You can see that Most of my money is in C, D, and E rated loans.  You can see that if you look at all my notes, the annualized return is 13.39%, but that if you look at my seasoned notes--those that are more than 11 months old, the return is 12.88%.  That is because the older a batch of notes gets, the more defaults there are.  It is been Prosper's experience that once a batch of notes reaches 11 months of age, returns stabilize.  The dashboard also shows you the annualized return by grade of my seasoned notes.  

If you click on the screenshot you can see it better but a few highlights: 

• The average interest rate of the notes I own is 17.5%
• My payments in excess of principal are $3,076.21
• The amount of principal that has been charged off is $1,115.95
• My gain to date is $1,960.26 (the account is about 18 months old)
• 49 notes have been charged off and/or sold (they sell charged off loans and you get a few cents on the dollar for them)

As with Lending Club, the rate quoted above does not account for cash drag--money that is in your account buy not earning interest because it is not currently invested in a note (as of this minute that is $200, which is pretty typical for me).  If you look at the increases in the value of my account the last few months, since the last principal infusion, and annualize it, you'll see that I'm earning about 6.6% annually.  If you use the XIRR calculator on my account, the annualized return is 10.9% reflecting, as did the Lending Club calculations, that the effective rates drop as the accounts age.  Still, whether 6.6% or 10.9%, it is more than I got in the stock market last year.  

Financial Update First Quarter 2016

Wow, it seems hard to believe that three months have passed in 2016, but they have.  This week's post will look at our financial status after the first quarter of 2016.

Bank Savings:

We haven't added any money to our savings account but our checking account is about $7,000 more than it was at the end of last year.  January, February and March are our saving months; we have no big periodic bill due during these months.  In April we pay car insurance.  May is summer camp.  Catholic school tuition is due in June, along with life insurance.  July is vacation.  August is college tuition and homeowners and flood insurance.  September is an "off" month, unless we are still paying the homowner's/flood; and car insurance rolls around again in October.  November is "off" and in December we pay for Christmas, college tuition and property taxes.  The point is that while it is much better to have saved the $7,000 than not, it has to help pay those big bills in months to come.

My 401K:

This is up, a little since the first of the year, which is a good thing since it was down almost 5% for the year as of the end of February.  I'm putting 11% of my pay into this account and the firm kicks in 5%.  

Our Vanguard Portfolio:

We have several accounts with Vanguard.  Our Roth IRAs are invested in the S&P 500 Index Fund.  We have a small taxable account that was moved from a brokerage firm to Vanguard, and my husband and I both have regular IRAs that were moved from the brokerage to Vanguard.  When we moved those accounts, we sold the funds that were significantly under-performing as compared to their index but we didn't want to sell everything because of the fees and taxes.  The investments brought over from the brokerage firm are a large collection of various styles of mutual funds.  We took the money from the funds we sold and used it to buy Vanguard's Total Market Index Fund, Total International Bond Index fund, Total Bond Market Index Fund and Total International Stock Market Index fund.  The total value of the account is up for the year, and it has paid over $1,100 in dividends.  

Motif Investing:

I've invested $7,000 in a variety of stocks.  Basically Motif lets you design your own ETF; you can buy shares in up to thirty companies at one time for one commission of $9.95 (and there are times they reduce that price for at least some transactions on a motif).  You can either pick your own stocks or buy a pre-designed motif, and I've done both.  I'm up about $200 since the beginning of the year, and that includes dividends. If Motif sounds interesting to you, use my link and we'll both get $100.00..

Loyal3:

I haven't been keeping up my Loyal3 Lunch portofolio; I got into a couple of busy weeks when I ate out way too much and my stats on those posts weren't all that great, so I kind of lost interest.  However, the portfolio I have is doing well; it is worth 6% ,more than what I spent on it.  I have invested in AMC, Walt Disney, Hershey, Intel, Kohls, Target and VF.  All are up except Disney and I plan to buy more of that this week.  

Lending Club:

My account value is up $321 this quarter which gives me an annualized return of 6.6 percent.  I have not added to this account, and do not plan to do so in the near future, just because I want to watch the returns without the addition of new money.

Prosper:

I added $300 to this account in January, and I plan to add some more once we sit down and look at those once a year bills and make sure we  have enough money to pay them.  This is where we are saving for our next car(s).  We have enough money in our savings account to buy those cars tomorrow if we had to (and we buy new (to us) cars when we need to and not before) but it would clean us out.  In Prosper the money gets more interest (we hope) and is reasonably liquid so would use Prosper money to rebuild our savings account.  The account value is up $323 (plus the $300 we added) for an annualized rate of 6.5%.

Kickfurther:

Kickfurther  is a crowdfunding site where investors help companies finance inventory by purchasing that inventory and then returning it to the companies to sell on consignment.  You can read a lot  more about Kickfurther in other posts on this blog.  So far this year I've added about $37.00 to my investments at Kickfurther.  I also continually reinvest returns.  My account is now worth more than it was January 1.  My lifetime investment is $2,691.67.  I've gotten $15 in bonuses and my lifetime profit is $184.23, or about 6.8% of my investment.  Considering I started with Kickfurther about a year ago, and didn't put most of the money in until late summer/fall, that's not too bad.  However, looking at my investment list, I think there is a decent chance I'm going to lose over $100 of that, depending on how much Kickfurther is able to make off repossessed inventory, and that is something that no one knows at this time.  If Kickfurther looks interesting to you, use my link and get $5.00 toward your first investment. 

Freelance Writing:

One of the companies about whom I wrote on this blog asked me to write a post for their blog.  Then I started soliciting clients and looking for work and so far this year I've earned over $200.  Considering there is no commute,  and I can do it in my pjs while supervising homework, it works for me.  At least at this point my boss doesn't have to worry about me quitting my job to write full time.  

Conclusion:

Things are pretty much on track.  That $7000 extra in our checking account will pay the car insurance and the Catholic school tuition.  We should be able to handle most of the other bills out of monthly income, but we'll need to save up for that August tuition payment and the homeowner's insurance payment.  The market is doing well so we are making money, and that's a good thing.  

My Peer Lending Accounts: February 2016

If you are going to be a financial blogger, you have to decide how much of your financial information you are going to make public.  On the one hand, I know that when I read blogs, I like to see people with whom I can identify.  To me, it seems like it would be easy to save money if you have income that is twice mine (though I know that many people in that income bracket have expenses that are twice mine as well).  Also, if you are going to tell me how I should invest my money, I'd like to see some evidence that you are successful at managing yours.  On the other hand, I'm not comfortable spilling all the information about my income and net worth.  To that end, I've decided that there are certain investments about which I will be writing.  I'm going to give you some idea of how important they are to me, and will detail my earnings and losses.  On other investments I'm going to talk about percentages.  My Peer-to Peer Lending accounts are accounts on which I'll be making full disclosure.  As to how important these accounts are to my net worth, I'll just say that these accounts are our next two cars (we buy used).  Losing every penny might not be catastrophic but it would definitely hurt.

What Is Peer-to-Peer Lending?

Peer-to-Peer Lending, a/k/a Marketplace Lending is an online marketplace where those who want to borrow money can do so, if they qualify, and where those who want to invest money can do so by purchasing all or part (usually part) of those loans. As the borrowers pay off the loan, investors receive payment of principal and interest.

My Investments:

Prosper:

I put $5,000 in Prosper at the end of 2014.  I added $5,000 each on February 16 and March 23.  On January 30, 2016, I deposited $300.  As of February 9, 2016, the account is worth $17,005.97, meaning that in a little over a  year, I have earned $1705.97, which has all been reinvested.  This portfolio has always been auto-invested using tools on Prosper's website.   About 1/3 of it is in A and B rated loans.   According to Prosper, my annualized return is 13%.  However, right now I have thirty-nine late notes; the question is how many of them will default.  Prosper does not publicly predict this. Rather, Prosper breaks down your return by "All Notes" and "Seasoned Notes".  Experience has shown that most borrowers who default do so relatively early in the life of the note.  Prosper considers notes to be "Seasoned" by 10 months; after than, in their experience, returns stabilize for a given vintage and do not drop quickly or significantly.   My seasoned returns are $13.41% because my early purchases did not include A and B notes.  To put that number in perspective, the average yield of my notes at acquisition, in other words, not accounting for defaults, was 17.09%.   

Lending Club:

Lending Club was my first foray into Peer-to-Peer Lending.  I've done a lot of different things within this account, frankly to the point that I've lost track of some of them.  Some of the notes were purchased to attempt to get a high yield.  Some were purchased with safety in mind.  Some were new when purchased; others were bough on the resale market. In total, I invested $17,550 between July, 2015 and March, 2015.   Lending Club shows you two different rates of return.  The first is the rate that is comparable to Prosper's--a rate that does not penalize you for late notes until those notes are actually charged off.  As of February 9, 2015, that rate is 10.76%.  Lending Club also offers an "adjusted" rate of return, which writes down late notes by various percentages based on how late they are.  It is a hypothetical return--the write down doesn't actually happen, but it is supposed to give you a more realistic view of your likely returns.  My adjusted rate of return is 7.93%.  My current account value is $19,405.45, which is adjusted to $18,919.69.

Returns:

It is difficult to get a number to use to compare Peer-to-Peer results with other investments.  When I buy stock, 100% of the money I invest in that stock goes into that stock (minus any sales commission).  It stays there until I sell the stock.  I may also get dividends.  When I sell the stock, I know how much I made (or lost) and how long I owned the stock. While I may move in and out of the market, it is not something that most normal people do multiple times daily.  With peer-to peer lending, I invest a sum of money.  Once it hits the account, I select notes in which to invest--either manually, or using one of the automated systems.  Depending on how much money I want to invest and how many loans are on the platform that meet my criteria, it can take one day or many to totally invest the money. However, once the notes are chosen, it may take up to ten days to complete the funding process, or either the platform or the borrower may decide not to complete the loan.  If that happens, then the money I invested has to be re-invested in another note.  It took me over a month to completely invest $5,000 at $25 per loan.  Interest does not start accruing until the borrower has the money. Once the borrowers start paying, the platforms take 1% as their fee.  Also, late fees can be collected, and of course, some borrowers quit paying and the notes are lost.  Finally a lot of notes are paid off early.  When the notes are paid, the money received is not earning interest until it is re-invested.  As of this writing, I have about $400 in uninvested cash and committed to notes which have not been finalized in Lending Club, and I'd say that's a pretty average figure for me.  This phenomenon which is referred to as "cash drag" means that even though Lending Club says my return is  7.93%, it is actually less than that because a certain amount of money is earning no interest at any given time. Despite the difficulties, there are several methods people use to compute returns:

Using the platform figures:

This is the easy way.  While it does not take into account uninvested cash, it is accurate as far as the notes themselves go and it gives you a benchmark to compare to the platform.  The "seasoned" returns for Prosper and the "adjusted" returns for Lending Club are more accurate than the gross figures.

Computing the difference and annualizing it:

If you are not adding to or subtracting from your account regularly, this method is easy.  Simply review your monthly statement and see how much more (or less) money you have at the end of a period than at the beginning, and then annualize that number.  My Lending Club figure, computed from March forward (since that is the last time I contributed money) is 10.22% and that does not account for late notes.  For Prosper is is  11.54%.  

XIRR:

This is a mathmatical computation that can be done on spreadsheets with the right formula or can be done online here.  It views the account as a whole and takes into account money that comes into the account and goes out of it.  Depending on the final value you assign the account, it can take into account your likely losses on late notes.  For Lending Club, my XIRR return is 7.24% using the adjusted value of my account and 10.11% using the actual value.  For Prosper, the return is 11.71%

Conclusion:

In short, for accounts with no principal infusion for eight months, my XIRR returns are about 1% less than the returns quoted on the platforms.  Nevertheless, over the last year, this has been my best performing investment.

Should You Invest?

Maybe.  In some states, those who invest in peer-to-peer notes are required to have at least $70,000 in investable assets.  I've read that it is recommended that no more than 10% of your investable assets be in peer-to-peer lending.  I've also read that the best way to protect against substantial loss is to diversify, meaning to purchase at least 100 notes. Prosper claims that since July, 2009, no one who has purchased at least 100 notes has had a negative return (Prosper's system was vastly different prior to July 2009).  Lending Club states that historically, less than 1% of those who have invested in at least 100 notes have had a negative return. If you have few investable assets, peer-to-peer lending is too new and too risky for you.  On the other hand, if you have $2,500 or more that you can afford to lose, Lending Club and Prosper offer the possibility of returns far higher than bank accounts (with much more risk), and because of the monthly payments made by the borrowers, they can be set to return substantial cash to investors relatively quickly.  For example, between January 1 and February 9, my account has paid over $1,600 to me in principal and interest.  While I've reinvested it, I could have withdrawn it if I needed it. 

How to Invest?

I would recommend going to either Prosper or Lending Club, opening an account and investing $2,500.  Use that money to purchase 100 notes spread over different risk levels using the auto-invest feature.  Then, sit back and watch.  See how defaults affect your returns.  Watch the interest accrue.  Read articles about filtering and check out some sites that do it for you like NSR invest or Blue Vestment.  Decide going in that you are going to leave your money there for at least a year, and that the money you invested is money you can afford to lose.  After a year, review the situation.  While most people find that the higher potential return of C, D, and E notes makes them a better investment than A and B notes, others hate the idea of loss of principal and so prefer to stick with less risky notes.  After a year you should be in a position to move your portfolio toward your preferred risk/return profile.

I have found peer-to-peer lending to be a valuable addition to my portfolio and believe it is appropriate for many people; however, I am not a financial adviser, and realize that no investment is right for everyone.  Use your own best judgment; no one cares about your money as much as you do.  

Evaluating Your Investments: Income- Focused Investments

Someone once asked my why I invested in a particular thing. My answer? "To make money, of course". That answer was the truth but the point of the question was that there is no perfect investment; they all have strengths and weaknesses and when evaluating a new investment or deciding how to allocate your money among investments you have, you have to consider the strengths and weaknesses of each type of investment.  This article will focus on investments that people buy for income--for money paid to them now, whether that money is to be used now or reinvested for future use.

Types of Accounts

First we need to quickly look at the basic types of investment accounts.  Most types of investments can be held in any of these types of accounts.  Which you pick depends on your current and future needs.

Normal Accounts

These are opened by default; the others must be chosen.  Income from normal accounts is taxed yearly.  While the custodian of the account may have rules governing withdrawals, the government does  not. The advantage of these accounts is that you can get your money when you want it.  The disadvantage is that you can get your money when you want it--and that you have to pay taxes yearly.

Used with permission of 401kcalculator.org

Roth IRA

Once money is placed in a Roth IRA you will never pay taxes again on it again or on the money it earns.  However, contributions are not tax-deductible when made.   What's more, you can withdraw your contributions (but not your earnings) at any time without penalty.  Some people use Roth IRAs to save for medium-term goals; they withdraw principal when needed but the earnings stay to grow, and grow tax-free.  Another feature of the Roth IRA is that you never have to withdraw money from it; the account, and its tax-free status, can be passed on to your heirs.

IRA or 401K

You do not pay taxes on money you put into these accounts.  However, unless you are over 59.5  years, you pay penalties if you withdraw money.  Also, you have to pay income taxes on any money withdrawn from your IRA or 401K.  Finally, the law requires people over 70 to take minimum distributions from their IRA or 401K, based on age/life expectancy.  

Types of Investments

This article focuses on investments people hold for the income they generate.  

Bank Accounts

Description:  Very simple. Take your money to the bank and deposit it. They agree to pay you very little interest but your account is insured by the government and except for certificates of deposit, you can access your money at any time without penalty.  

Liquidity:  Bank accounts can be accessed at any time.  

Stability:  The value of bank accounts is predictable and they are insured by the government so you know they will not lose value.

Growth Potential: After taxes, bank account earnings do not keep up with inflation, much less exceed it. 

Taxes:  Interest on bank accounts is taxed as regular income.

Conclusion:  Bank accounts are for money you may need to access on short notice, or which you have a specific plan to sell in the next year or two.

From Wikimedia Commons

Bonds

Description:  Bonds are debt instruments issued by corporations or governmental entities.  When you buy a bond, you are lending money to that entity.  In return the entity agrees to pay you interest, usually yearly. and to return the principal at the end of the term of the bond.  Generally speaking the more financially stable the issuer is, the lower the interest rate.  Generally speaking, the longer the term of the bond, the higher the interest rate.  

Liquidity:  Bonds can generally be sold relatively quickly (unless the entity that issued them is having financial trouble), but you may not receive full value for them. 

Stability:  It depends on the bond.  Generally speaking, as long as the issuer is able to make the payments, the bond will be worth at least what you paid for it, if you hold it to maturity.  If interest rates drop during the life of the bond, you could sell the bond for more than you paid for it; if interest rates increase during the life of the bond, the price of the bond, if you try to sell it, will decrease.  

Growth Potential: A bond's interest rate is set at the time it is issued.  If the issuer is financially viable, the interest will be paid.  The only growth is the income, plus any increase in value, if you choose to sell, if interest rates on newly issued bonds are less than the interest rate on your bond.

Taxes:  Some bonds issued by government authorities offer tax-free income.  Corporate bond interest is taxed as regular income.

Conclusion:  Bonds are a good source of income, and if high-grade bonds are chosen, chances are very good that they will not lose value if held to maturity.

From Wikimedia

Bond Funds

Description:  Bond funds are mutual funds that invest in bonds.  A mutual fund means that a financial manager pools your money with the money of millions of other people and invests it in a way consistent with the stated goals and means of the fund, with the hope of making money. 

Liquidity:  Bond funds  can generally be sold the same day you request. 

Stability:  While the share price of bond funds does not vary as much as the share price of stock funds, there is some price variability.  When interest rates rise, the per-share price of your bond fund will fall; when interest rates fall, the per-share price of your bond fund will increase.  As with bonds themselves, funds that buy short-term bonds tend to pay less than those that buy long-term bonds, but the share price of short-term bond funds does not tend to go up and down as much as the share price of funds that hold longer-term bonds.  

Taxes:  Some bonds funds hold  bonds issued by government authorities and they offer at least some tax-free income.  Interest from funds that hold corporate bonds is taxed as regular income.

Conclusion:  Bonds Funds are a good source of income, for those who can tolerate a little volatility.  

Money Market Funds

Description:  Money market funds invest in very short-term financial instruments, some as short as overnight.

Liquidity:  They can be sold the same day you request.

Stability:  Money market funds seek to maintain a stable share price, and most sell for $1.00 per share.  

Growth Potential:  These will likely lose money after inflation.

Taxes:  You can buy either tax-free funds or taxable funds.  Taxable funds, in general, pay more interest, but those in high tax brackets may do better with tax-free funds.

Conclusion:  Since these are insured, you have to decide whether the additional interest over a bank account is worth it.  A lot of people use money market accounts with their broker as a place to hold money in between investments.

Peer Lending

Description:  Peer to Peer Lending means making unsecured personal loans to individuals who want to borrow money.  Rather than lending a lot of money to one person, the two major platforms, Lending Club and Prosper, allow you to pool your money with other lenders so that you fund parts of loans to many people.  As a lender, you are paid monthly by the borrower until the loan is paid.  

Liquidity:  Lending Club notes can be sold at any time, except when payments are pending.  Propser notes can be sold only if current.  Whether you get face value (or above or below it) depends on how much you want to sell it.  Generally speaking high-interest notes with a good payment record can be sold for more than face value; low interest notes or notes with poor payment histories generally sell for less than face value.  It is a supply and demand system--you can ask whatever price you want; the question is at what price you will find a buyer and the more/sooner you want to sell, the lower your asking price.  While emptying your account may take a couple of weeks, remember that each note pays principal and interest monthly, and that they can be paid off by the borrower at any time.  Last month, the payments I received totalled about 5% of my account.  While I reinvested them, I could have chosen to withdraw them if I needed the money.

Stability:  Lending Club says that if you hold at least 100 notes and no note is more than 1% of your account, then according to their historical statistics, you have less than a 1% chance of losing money.  See charts here.  Nevertheless, defaults are to be expected and your return will not be stable over time.  However, according to Lending Club statistics, for an account of over 100 notes, you will have a hard time, over the long term, earning less than 5% or more than 9%.  

Growth Potential: While it is possible to sell well-performing notes above par value, you then lose  your source of income.  The only real growth with this investment is via compound interest, and that's not insignificant when interest rates are close to 8%.  

Taxes:  Unless held in an IRA, interest on Peer-to Peer notes is taxed yearly as regular interest income.  

Conclusion:  Peer to Peer notes are a good source of current income.  While they are not guaranteed (and a certain number of defaults are to be expected) banks have been making money on unsecured personal loans for years.  Lending Club recommends that you have no more than 10% of your investable assets in Peer to Peer notes.  

Used with permission

Dividend-Paying Stocks (or stock funds)

Description:  A share of stock is a share in the ownership of the corporation.  As a co-owner, the value of your share of the company increases as the value of the company increases.  Also, the company may pay out some of its income as dividends.  Given the low interest rates today, many investors find companies that pay dividends over 2%  to be attractive sources of income.  Some such companies are Target, Mead Johnson Nutrition, AT&T, and Darden Restaurants.  

Liquidity:  Shares of stock can be sold at any time; however, if the market is down compared to when you purchased the stock, you will lose money selling.  Of course if the market is up, you'll make money.

Stability:  Stock prices are not stable.  However, if your purpose in purchasing these shares is income, as long as the shares are dropping due to the overall state of the market rather than a problem with the particular stock, then most income stocks are stable investments--stable companies that pay good dividends usually continue to be stable companies that pay good dividends.  

Growth Potential:  Generally good.  Over time, no investment class has performed as well as the stock market. With dividend stocks, you not only get the income from the dividends but also appreciation of the stock price. 

Taxes:  Dividends are taxed as regular income.  Capital gains (money earned by selling stock for more than you paid for it) are usually taxed at a lower rate.  

Real Estate Investment Trusts (REITs)

Description:  REITs pool investor's money and invest in real estate.  The laws under which they are organized require them to pay out 90% of their income as dividends. 

Liquidity:  Shares of  can be sold at any time; but like many other investments, the price you get may not be the price you paid.

Stability:  REITs invest in real estate; therefore they are as stable as the real estate in which they invest.  They are also not closely correlated with the stock market so it can lend stability to your overall portfolio.  

Growth Potential:  If the price of real estate increases, the share prices may go up, giving you growth.

Taxes:  Dividends are taxed as regular income.  Capital gains (money earned by selling stock for more than you paid for it) are usually taxed at a lower rate.  

Conclusion

The general rule in investing is that the higher the risk, the higher the reward.  The lower the risk, the lower the reward.  Bank accounts and government bonds have low rewards, but you know the money will be there when you need it.  On the other end of the spectrum are dividend stocks and REITs.  As with all investing, playing it too safe may mean not getting the growth you need, but no safety net means you could be really hurt if things do not go your way.

How do you invest for income?

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and The Frugal Cottage*

Why Are You Saving Money Anyway?

In picking investments, I believe it is important to keep your goals in mind.  While most of us would define our goal as "retirement", even those of us in our 50's and 60's have other goals as well.  Here is a description of my financial accounts, why I have them and what I expect to achieve:

Checking Account:

Used with Permission

This pays the bills day in and day out.  It is a no-fee account at a local bank where my family has five accounts.  While it pays a smidgen of interest my only real expectation from this account is that it doesn't cost me money.  If it get "too big" (a problem we haven't had in a while) the excess is transferred to a savings account. We do not run this account down every month and rarely to we have a routine expense (and I call replacing appliances and fixing cars routine expenses) that cannot be paid from this account.

Savings Account:

This is at the bank too, and while it pays more than the checking account does, the money is here for safety and accessibility.  This is where our next car is kept.  It is where the rest of the money for our bathroom renovations is sitting.  We are dollar-cost averaging some money from my inheritance into our Roth IRAs, and that money is in this account.  It is as close to an emergency fund as we have.

Peer-to-Peer Lending Accounts:

Our goals for these two accounts (I have one with Lending Club and one with Prosper) are both liquidity and growth.  We started with Lending Club about a year ago with a small investment to "kick the tires" and you can read some post I wrote about it.  To some extent, I am still "kicking the tires", trying different strategies to determine the results.  At one point I bought a bunch of notes with relatively few payments left, with a goal of getting some interest (I aimed for about 6%) with high monthly turnover of funds.  I figured that if we needed money, the payments could be withdrawn, and if not, they could be reinvested, but that the account would earn more than the bank pays.  Yes, there is more risk but so far I've had very few resale noted default as compared to those bought new.  In short, I am hoping to make money on these accounts, but I believe they are more stable than the stock market as a place to put money I may need in the next couple of years, though not immediately. If you want to invest $10,000 or more, use this link and get a bonus $50.00.

Kickfurther:

Right now, this is my financial toy.  I have $1,000 invested and the plan is to invest another $100 per month for the next year, and then re-evaluate its place in our financial future.  Kickfurther crowd-funds inventory purchases for small businesses.  Once the inventory sells, investors are paid back their investment, plus an agreed-upon percentage, whether that payback takes more or less time than anticipated.  The risk of course is that the inventory doesn't sell.  The risk is mitigated by the fact that the investors own the inventory, and if the vendors do not sell it, the investors decide as a group what to do with the inventory. Backers are also offered to opportunity to help sell the products for a commission. Here is one I'm backing and helping to sell:

Click here to go to my store to purchase

  Kickfurther is new and I have no idea what the default risk will turn out to be.  Returns vary depending on product and term but seem to be averaging about 1.5% per expected month until full payback. If this pans out, it could be a great place for both growth and liquidity as companies pay investors monthly.  The real question is what returns can the platform maintain and keep the supply of businesses and lenders in balance.  If you'd like to trying investing with Kickfurther, the minimum investment is $20.00 and if you use this link, you get a $5.00 credit, so your first investment could have quite an upside.  Also, if you have a business that sells a tangible product (as opposed to a service or intellectual property) you can use this link to see if Kickfurther makes sense for you.  According to things I've read, their rates are lower than On Deck or Kabbage.

Tax-Advantaged Retirement Accounts:

Our IRA's, Roth IRA's and 401(k)s are in this category.  They are invested in a diversified portfolio of mutual funds appropriate to our age and risk tolerance.  The goal is long-term growth moving toward income/stability in a few years.  We invest regularly in these accounts via payroll deductions and they are the bulk of our assets.  While some of the funds generate dividends, they are not our focus.  This is the money we expect to support us in our old age and to help support my son, who has autism, after we are gone.  Right now this money is about 80% in stock funds; about 20% in bond funds, but we will need to move to a more conservative allocation soon (my husband is 59, I am 54).

Motif Investing:

I only invested $5,000 in a variety of stocks, split between those oriented toward growth and those that pay dividends.  This is as much toy as investment right now, but it is interesting to see how my picks work out.  I wrote about Motif Investing here, and if you want to try it, click this link; we'll both get $100.00 if you invest via this link.

What type of investments to you have and why?

*Part of Financially Savvy Saturdays on brokeGIRLrich, GoldBean Blog and Debt Free Divas*

Also linked to Final Friday Finance

My Inheritance

My parents were financially successful.  They had some good luck and they made some good luck, and in the end were able to not only have a comfortable old age but were able to leave a substantial inheritance to their five children. While it is more money that I have ever gotten in one transaction, it will not be enough, in and of itself, to support us in our old age.  So, what did we do with all that money?

My 401(k): 

I got the first installment of my inheritance in June, and it was close to six months of take-home pay for me.  At the end of June we are allowed to change our 401(k) contributions and I changed mine to eliminate take-home pay, so in essence, that first installment of my inheritance went into my 401(k).  I was able to live off my non-taxable inheritance, and turn my paycheck into tax-deferred retirement money.

Marketplace Lending:

When the big check came in February, I put about 10% of it in marketplace or peer-to-peer lending, split between Lending Club and Prosper.  I have been investing with Lending Club for almost eight months now and I've been very happy with the returns.  Using XIRR, which is generally considered to be the most accurate way of computing returns with this investment, my returns are over eight percent.  One thing that can be an advantage or disadvantage to this investment is that it turns over a substantial amount of money ever month.  Looking at a random loan in my portfolio, I see that it has a monthly payment of $.62 on a $25 investment.  The first couple of months, $.36 is interest and $.26 is return of principle, so don't confuse payout with return, but the fact of the matter is that between my accounts at Lending Club and Prosper, if I choose not to reinvest my returns, I can withdraw close to my entire paycheck per month until some of the loans start to be paid off.  While it is not the instant liquidity of a bank account, it gives me access to some of my money without having to put assets up for sale--but if I do want to sell and cash out early, there is a secondary market for the loans. Depending on the costs of our other goals, we may add more money to this asset class.

Motif: 

I've always wanted to invest directly in the stock market, to pick my own stocks and to watch them (hopefully) grow and make me money.  My husband and I bought stock in Novellus quite a few years ago, watched it almost triple in price, and then we sold it when it had dropped to twice what we paid for it.  If only...  Honestly, I know mutual fund managers get paid big bucks to pick winners and few do better than the market as a whole.  That's why I can't justify the costs or risks of putting a lot of money into individual stocks.  However, there is a new player in the industry, Motif Investments.  Using a web interface, clients selected a basket of up to thirty stocks to purchase at one time.  You can pick a basket (Motif) that they designed, one that a fellow investor designed or one that you design yourself.  There is one $9.95 charge to purchase as much of the motif as you want. While this is an investment on which I hope to earn money, at this time I am only investing about $5,000 and I'm considering it to be a toy.  If I'm really successful, I may reconsider.  I haven't picked anything to buy yet.

Roth IRA:

Our Roth IRAs are with Vanguard and we maxed them out for 2014 and plan to use the inheritance to max them out in 2015 and 2016.  Right now, all the money is in their 500 Index Fund.   We are probably going to move future contributions to a dividend-centric index fund.

Home Renovations:

Our house is forty years old.  We've lived here for twenty and raised 2.5 kids (one is ten years old).  While we renovated the kitchen fifteen years ago, the rest of the house needs new floors, new paint and general freshening.  We plan to renovate both bathrooms with new tub surrounds, new vanities and new floors.  Hopefully the budget I have in mind will work; if not, we'll need to make some choices.

With Our Financial Advisor, In a Taxable Account:

As mentioned in other post, our financial advisor has us in a portfolio of many mutual funds.  We bought them all at one time, and since that time the market has gone down and not returned to that point.  We realize that part of the reason our 401(k)s look good next to these accounts is because funds are added regularly.  Therefore, we are going to invest about ten percent of the inheritance with our advisor, in two or three different chunks.  Hopefully it works for us.  

Bank Account:

We know we are looking at getting my daughter a car (used) when she graduates from college unless she does as she has said she wants to, and moves to New York City.  We know my husband is driving an old car.  We know my youngest will likely end up in a Catholic high school where tuition is approaching $10,000 per year.  We are going to keep the rest of my inheritance in the bank to help us  handle these expenses when they get here.

What did you do with your inheritance?

New Financial Product: Peer to Peer Lending

One day when surfing the web, I happened on to a new type of investment, "peer-to-peer" or "marketplace" lending.  Basically it is a loan product where lenders (investors) lend money to borrowers through an intermediary company that did the underwriting and collecting.  Average returns near eight percent were promised.  Surely, that couldn't be right.  Surely there had to be something funny going on. Surely it was like those multi-level marketing schemes were a few did get rich, but most people didn't.  It couldn't be as good as it seemed, could it?

https://www.lendingclub.com/info/statistics-performance.action

This chart summarizes Peer-to-Peer lender, Lending Club's claims about investor returns.  In short, as long as you have more than 100 notes ($2500 invested, if you buy new notes) your chances of actually losing money (as long as current trends in repayment continue) is very low.

This chart shows that the more money you have invested with Lending Club, the harder it is to stray very far from the norm of about 8%.  You can see both of these charts, along with other information, at Lending Club's website.  

This definitely caught my eye and I headed over to Google to do some more research.  I learned that the concept was pioneered by Lending Club's main competitor, Prosper. The product both offer is unsecured personal loans to people considered to be reasonably good credit risks--in other words they are doing what banks have been doing for years via credit cards.  As my brother, the used car salesman said "I can make money lending money to any type of person; I just need to price it correctly".  Unfortunately, Prosper's first model was that lenders bid on loans and since the lenders were amateurs, they did not price the product correctly and most lost money.  

One interesting thing about both Prosper and Lending Club is that they allow interested parties to download their historical databases so they can analyze the data and learn what they can from it.  Nickle Steamroller is a website that hooks into that data and then allows you to filter it to determine the historical performance of loans of various characteristics.  Overall, the rates of return shown there do not appear to be close to 8%, but playing with back testing filters, it does not seem impossible to get good returns, especially compared to what the bank is paying.  One thing I did note was that returns have gotten progressively better and that when you look at the three year loans issued in 2010 and 2011, the return on investment (interest, minus fees, minus charge-offs) was close to 6%.  

We decided to put some of our money into Lending Club to see how it worked. You can read about my experiences on my other blog, though I will be writing more here later.  In short, so far I've been happy with my investment and, while I do not claim any real expertise in financial matters, I encourage you to research peer-to-peer lending to see if it is the right place for some of your money.