In the early days of Lend Academy I regularly wrote about my investment strategy for Lending Club and Prosper. I discussed the wonders of filtering and how analysis of historical trends can really boost returns. There is a popular saying, though, when it comes to investing: “past performance is no guarantee of future returns”. So it goes with marketplace lending.
Ryan covered this in some depth in this post a few months back. A few years ago E-grade loans at Lending Club were the best performing investment out of all their loan grades. In 2015 they were the worst performers. If you look at the analysis that Ryan did you will notice that B-grade loans from 2015 are the best performing segment.
So, if you were like me and you saw that D, E and F-grade loans were the best performing loans historically you focused your investments on those grades. But a person with a portfolio of B-grade loans would have likely outperformed the D, E and F-grade investments in 2015 and 2016. Now, we have had many interest rate increases since then so again the future may well be different from the past, we just don’t know. I guess my point is it pays to be well diversified.
The other point to note here is that, despite the challenges from 2015, Lending Club and Prosper are generally getting better at underwriting. What I mean by that is that it is more difficult today to find pockets of miss-pricing than it was a few years back. Whereas you could easily see a 4% or 5% lift in returns by applying some simple filters today the lift is more like 0.5% or 1%. And of course, there are no guarantees there will be any lift at all.
Regardless, I think it is still useful to apply some basic filters, particularly if you have multiple accounts, and so I will share below my strategies that I am using across my myriad of investment accounts at Lending Club and Prosper.