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My Quarterly P2P Lending Results – Q4 2013

by Peter Renton on January 28, 2014

Every quarter I give readers a look inside my p2p lending investments so everyone can see how I am doing. I do this in the spirit of transparency that this industry has been built on. I also want to be accountable to readers and demonstrate that I practice what I preach. I have been sharing these updates now for over two years – you can see all the previous reports here.

Overall P2P Lending Return Now at 11.85%

The final quarter of 2013 was a very interesting one for my p2p lending returns. My overall return is at an all time high but at the same time some of my accounts have struggled with defaults this past quarter. Since changing strategy in 2011 to a more aggressive portfolio my quarterly returns have steadily increased from around 8% to now almost 12%. While at the same time the average age of my overall portfolio continues to grow.

Below is the table showing a breakdown of my six accounts at Lending Club and Prosper.

AccountBalance 12/31/12AdditionsBalance 12/31/13Net InterestAverage AgeXIRR ROIReturn on SiteSeasoned/ Adj ROI
Totals $174,825.68 $2,500.00 $198,373.02 $21,047.34 11.85%
Lending Club Main$29,089.92$-$32,222.70 $3,132.78 23.2 mths10.77%11.29%9.53%
Lending Club Roth IRA$6,063.54$-$6,760.35$696.8120.5 mths11.49%14.41%12.49%
Lending Club Trad IRA $65,858.23 $-$74,998.89 $9,140.66 25.9 mths13.88%10.69%9.17%
Lending Club Roth IRA - 2$16,407.74$-$17,581.45 $1,173.71 25.8 mths7.15%7.53%7.00%
Prosper Main$54,722.41 $2,500.00 $63,907.45 $6,685.04 13.2 mths11.69%12.99%12.76%
Prosper - 2 $2,683.84 $-$2,902.18$218.3413.0 mths8.14%12.65%12.54%

Here are a few points to keep in mind as you are looking at the above table.

  1. All the account totals and interest numbers are taken from my monthly statements that I download each month.
  2. The Net Interest column is the total interest earned plus late fees and recoveries less charge-offs.
  3. The Average Age column shows how old, on average, the notes are in each portfolio. Because I am reinvesting all the time this number changes slowly.
  4. The XIRR ROI column shows my real world return for the trailing 12 months (TTM). I believe the XIRR method is the best way to determine your actual return.
  5. The Return on Site number is obtained from the platforms on the last day of the quarter.
  6. Both Prosper and Lending Club provide investors with a more realistic returns number – at Lending Club it is called Adjusted Returns and at Prosper it is called Seasoned Returns so I am now including these numbers in my table.
  7. I do not take into account the impact of taxes.

Now, I will delve into each account in a little more detail and provide some commentary on the numbers in the above table.

Lending Club Main

Lending Club Account Totals - Main

This is my taxable Lending Club account that was opened way back in June 2009. I originally invested $500 but soon added another $10,000 and over the years I have added an additional $14,000. So, my total investment has been $24,500 and it is now worth over $32,000. Astute readers may notice that the Account Value balance does not match exactly the closing balance in the above table. The reason for that is the screen shot above was taken two days into the New Year and so there are two extra days of payments reflected in the account value number in the screen shot.

While this account was started in a conservative way (focused on B and C grade loans), for the past three years I have been investing primarily in grades C-G. My average weighted interest rate is now 17.53% which is around a D-grade average. The returns on this account have been steady now for several quarters although I did see a bit of a drop in the last quarter due to a number of defaults.

Lending Club Main - Adjusted

Speaking of defaults I am also including the screenshot above showing the Adjusted numbers. This provides a more realistic look at the account and gives a better indication of expected future returns. For new accounts the difference between these numbers can be quite large – even with this old account there is a difference of 1.76%.

Lending Club Roth IRA

Lending Club Roth IRA

My Roth IRA is now almost three years old and with this account I have mainly invested in grades D-G. Although in recent months I have started adding an occasional C-grade loan into the mix. It still has the highest weighted average interest rate of all my Lending Club accounts at 19.01% and has the highest return according to Lending Club. But my actual return of 11.49% with this account of is considerably lower than the Net Annualized Return numbers. This is due to the difference between my calculation and Lending Club’s. I am looking only at the previous 12 months for my calculations whereas Lending Club is looking at the average return over the life of the portfolio.

I was pleased to see a rebound in this account last quarter as my real ROI had been dropping steadily for quite some time. I will be adding another $5,000 to this account before April 15.

Lending Club Traditional IRA

Lending Club Traditional IRA

This is my wife’s traditional IRA that was opened in April 2010 after rolling over a couple of different 401(k) accounts into Lending Club. At the time I opened it as a PRIME account and let Lending Club invest in a moderately conservative portfolio. But about two years ago I took the account off PRIME and began managing it myself. I have been quite aggressive with this account taking it from a weighted average interest rate of 12.3% in 2011 to 16.85% today.

This account has been the star in my portfolio in the last quarter. With a 13.88% TTM real return this was by far my best performing account. Since making the change to a more aggressive approach my returns have continued to increase every quarter. To give you some perspective when I took this account off PRIME my real return was 6.99%. I have pretty much doubled that return in two years. Now, I expect this is the high water mark for this account – I have a lot of late loans that will end up defaulting in this coming quarter.

Lending Club Roth IRA – 2

Lending Club Roth IRA - 2

This is my wife’s Roth IRA that was also rolled over to Lending Club in April 2010. This has been the conservative account in my portfolio – for over three years I let Lending Club invest in a moderately conservative portfolio. But I decided I was leaving money on the table by not being more aggressive with this account so I took it off PRIME and began investing primarily in C and D grade loans. It is still not as aggressive as my other accounts but I expect to slowly increase my returns here as the higher interest loans become a bigger part of my portfolio.

One interesting note about this account. While I took this account off PRIME in July last year, with the new and enhanced PRIME I have turned PRIME back on. But I am using PRIME to run an automated search for my Super Simple criteria and it is doing a decent job of staying fully invested. Interestingly, it is placing orders pretty much every day which is far better than the old PRIME that would only run orders once or twice a month.

Prosper Main

Prosper Main

My first Prosper account was opened in September 2010 and I have invested exactly $50,000 into this account since then. Pretty much from day one I focused on high interest loans on this account and today I have an average interest rate of 23.58%. With these higher risk borrowers comes the likelihood of more defaults. This account has been focused on the C, D and E grade loans at Prosper and my ROI has been steadily dropping as my account ages which is to be expected. At an 11.69% real return I am still quite happy with the returns here although I would like to get back over 12%.

Prosper – 2

Prosper 2

My smallest account is also my most volatile. With just 136 notes notes invested this account is most susceptible to the impact of defaults. This was very apparent in the most recent quarter. It was just six months ago that this account had a real world return of 15.87% – this has dropped dramatically now to just 8.14%. With an average interest rate of 27.7% this is also by far my most aggressive account so I should not be surprised that it is so volatile. My total balance this past quarter actually dropped for the first time as I received more defaults than interest earned in the previous three months.

The situation has been exacerbated by the fact that my Automated Quick Invest has failed to find enough of the high risk loans. I have decided to pull back somewhat on the aggressive nature of this account that has been primarily invested in E and HR grade loans. I am going to include a few more C and D grade loans from now on.

Final Thoughts on My P2P Lending Portfolio

My results in the fourth quarter of 2013 were the best ever – at an 11.85% TTM return I am very happy with how things have been going. But I also think this number will remain as the high water mark for my returns. I am going to slightly adjust my approach this year to be a little less aggressive – going forward I will be introducing a few more C-grade loans at Lending Club and B-grade loans at Prosper. Why? For two reasons. One, I think it will add more diversification to my portfolio and therefore reduce the volatility. Two, it will give me more loans to choose from as I put new money to work.

Speaking of new money. I am finally opening up a Prosper IRA. As I have said before I am no longer adding any new money into my taxable accounts – all new deposits will be in retirement accounts. I have already started the process of rolling over $50,000 into a Prosper Roth IRA. I will also be adding to my Lending Club Roth IRA for the 2013 tax year. You will read more about these new deposits in coming weeks.

Finally, as I always do in these updates I like to emphasize the Net Interest number. This represents the actual gains from the account. My total net interest continues to increase and at $21,000 now, the bulk of which is tax free, it could provide a nice income if I chose to start withdrawals.

Let me know what you think. I am happy to answer questions and respond to your comments about any of my p2p lending accounts. I look forward to hearing from you.

{ 19 comments… read them below or add one }

Bobby Lazenby January 28, 2014 at 3:30 pm

It appears as if you the returns your sharing are dynamic and not static. In order to have a more clear understanding of your returns you may want to consider looking at the returns annualized and on a cumulative net losses or a static pool basis. When investment returns benefit from continued reinvestment the actual performance is often misunderstood. For example, if you look at your total account under management of 1253, and sum the non-performing categories 251, it appears that 20% of your loans on a numeric basis have defaulted at some during their term. Obviously, when these defaults occur and the recovery will impact your return and loss calculations as well.

Reply

Peter Renton January 28, 2014 at 5:16 pm

Hi Bobby, I have focused on the trailing 12 months number because I feel like it shows actual performance and, when compared with previous periods, how that performance is trending. I don’t calculate annualized returns because the platforms provide that number and I include that number in the table.

And as for cumulative net losses I included the LC Adjusted NAR number for that purpose – it takes into account future losses in its calculations.

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writing2reality January 28, 2014 at 3:36 pm

As always Peter, your outstanding transparency has been a model to all of us in the blogging community, and is certainly appreciated. It has been great to see how your investments have really grown and compounded over the last couple of years, and is a public testimony to the legitimacy of P2P lending. With your upcoming rollover it will be interesting to see how quickly that account gets invested, even with your use of different automated investment tools.

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Peter Renton January 28, 2014 at 5:17 pm

Thanks! I will be sharing more about my new Prosper IRA and how long it takes to become fully invested.

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Ryan January 28, 2014 at 4:59 pm

Hi Peter, great to see your returns are still holding. More of a personal question (and not sure if you’ve talked about this in a different post), and I certainly understand if you don’t want to divulge much information – but curious to as your p2p lending accounts as a part of your overall portfolio and diversification strategy in other things such as stocks. It’s certainly tempting to constantly continuing to add money, but I certainly don’t want to overexpose myself.

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Peter Renton January 28, 2014 at 5:24 pm

While I am incredibly bullish on p2p lending I also believe in proper investment diversification. So, right now my portfolio is heavily weighted in stocks, with some bonds, real estate, commodities, private equity, cash and of course p2p lending investments. Both platforms suggest 10% as a maximum investment allocation and I think that is a good rule of thumb for most investors.

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John Woz January 29, 2014 at 2:19 am

Hiya,

I was wondering if you’re planning to update your post on the filters strategy you have used to invest? I’m looking to start off putting some money in LendingClub and would like to follow your strategy. I’ll use your early 2013 post if you aren’t planning to or if your strategy hasn’t changed much!

Thanks!

Reply

Peter Renton January 29, 2014 at 6:51 am

Hi John, My strategy has not changed much since 2013 but I will be updating my filters post next month with all the current filters I am using to invest.

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Sean Murray February 2, 2014 at 12:05 am

If your returns consistently beat the average annual rate of return in the stock market, how long until money managers start investing all their cash into lending club loans?

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Peter Renton February 2, 2014 at 6:58 am

We are already seeing this happen to some extent as more and more professional money managers discover p2p lending. But the vast majority are still skeptical and think it is too risky. I see a slow evolution here but it will be several years before everyone is clamoring to jump on board. I think we need another recession where stocks and bonds are hammered and p2p lending holds up well before everyone jumps on board.

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Frank Chiu February 7, 2014 at 11:40 am

What’s your loan selection criteria?

I have created loan selection criteria sets for three types of portfolios: Aggressive, Balanced, and Conservative. Each of those selection criteria currently filters in less than 3% of the new loans originated. I have data showing that my loan selection approach yields ~3% boost per year in returns when analyzing 240k loans from 2007 to 2013. I assume this is slightly higher with today’s relatively lower default rates. I do have a decent amount of A/B/C notes in the balanced portfolio to lower volatility. I focus on creating portfolios with 800+ loans to start (1.1k after reinvesting for a year) with the help of systematic allocation with orders filled within 10 seconds of each refresh cycle (4x daily, 365 days a year).

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Peter Renton February 8, 2014 at 7:13 am

I share my criteria annually and I am about to do another update. But it won’t be materially different from what I shared in 2013:
http://www.lendacademy.com/investing-in-lending-club-and-prosper-in-2013/

It sounds like you have done the analysis needed to produce an above average return and you have also realized the need to be quick. You are ahead of 95% of p2p investors out there.

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Storx February 27, 2014 at 12:11 am

I currently have a taxable lending club account with 65k in it that i have had since 2009, I am thinking of switching it over to IRA side for the tax benefits… Which one is the best? and is there a way to make the switch on the already existing account… or do i need to make another account?

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Frank Chiu February 27, 2014 at 10:50 am

Storx,

First of all, you would need to create a new IRA account (Roth or Traditional). You cannot switch all of the $65k from a taxable account to a Traditional or Roth IRA. The annual contribution limit is $5.5k ($6.5k +$1k if you’re over the age of 50). Before April 15, you can contribute for 2013 and 2014 so you’re looking at $11k ($13k if you’re 50+ years old).

Since you are using post-taxed dollars to contribute over to the IRA, you should sign up for a Roth IRA where you do not pay taxes when you distribute it later when eligible (59.5+ yrs old). For a Traditional IRA, you will still have to pay ordinary income taxes when you distribute in the future. I hope this answers your questions.

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Ravi March 16, 2014 at 12:41 pm

Hopefully one day the IRS will see OID income as similar to dividends and give us P2P investors a qualified tax rate. That would be just grrrreat!

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Ravi March 16, 2014 at 12:57 pm

Great stuff btw. I haven’t read through the rest of your posts, but it’s incredible to see how much cash you have put into P2P. I’ve got about $10K in a taxable account with Prosper and make the mistake when I first opened up the account of investing $50-100 in some of my early notes. Two of those have declared bankruptcy and ~$130 is in the delinquent status and I expect to be written off. Oh well, you live and learn. I’m glad to note that I have not invested more than $25 in a note since and never will again!

My split on Prosper now is around 50% A, 25% AA, and 22% B and a small 3% or so C and below. So far, my two defaults were both A notes (strange, huh?), but I’ve adjusted my filters am focusing on the B level. If I could choose a target allocation, it would probably be 35%-A, 50%-B, 15%-C/below. I’d like to have at least 100 notes in the smallest class @ $25/note, so based on my target C allocation this would be ~$16.7K total investment. Hopefully with new filters I can rebalance passively by the end of this year.

I’m hoping to grow this taxable account slowly to get a feel for how to best treat this neat asset class and also keep it tracking to no more than 10% of my liquid net worth (total investments + cash). My target for year end 2014 and 2015 is $165K and $200K, so planning to hit ~$16K by this year end and ~$20K by December 2015. By that time, a 10% return will start to mean thousands of dollars a year in income. Sounds a little too good to be true!

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Frank Chiu March 17, 2014 at 9:33 am

Ravi,

Have you considered automating your portfolio execution needs? I would imagine automatic allocation to highly desired loans and reinvesting recurring cash payments will be a long and manual process over time.

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Ravi March 18, 2014 at 2:41 pm

I started adding some filters this past January to prevent too much cash from building up. Also, now the payments have started becoming several hundred a month and I don’t always have time regularly to log in and browse listings.

I’m hoping that one day this can be a semi-passive investment that I don’t need to spend more than 2-3 hours per month to review activity and see if any adjustments would be beneficial.

If (or when) I start reaching $20K+, I definitely will not have time to regularly invest manually. Auto filters will also force me to be more disciplined than I am when I search through the listings.

I’m crossing my fingers this is as wonderful as I think it is so far!

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Frank Chiu March 18, 2014 at 3:50 pm

Ravi,

I’m facing the same issues and I have accounts larger than $20k. It’s just the nature of the asset class that requires constant allocations if you want to compound the payments/profits. I’m working on a tool to do this and would like your feedback on what the ideal process should to find a solution to this problem. My email is: gotfrank – at – gmail – dot – com

Reply

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