A couple of months ago I opened a Lending Club Roth IRA. At the time I recorded a video of the actual process of opening the IRA that you can watch here. I have been slowly investing my funds into new notes in this IRA. Last week Lending Club posted my initial NAR for the first time which, as you can see in the screen shot here, came in at just over 17%.
Actual Results May Vary
This high NAR reflects the fact that I am investing only in higher risk notes, those with grade D, E, F and G. My weighted average interest rate is 17.67% right now. Of course, you can impress your friends with an NAR of greater than 20% if you want to invest in just G grade loans. And because defaults will not impact your NAR for at least four months your account will look impressive for quite some time.
But that is not my purpose here. I am sharing this with you now just to show a starting point. You will not see another update on this account for many months until we can start to see the impact of defaults. I am investing in only 15-20 notes per week that meet my strict criteria, so it will likely take me four months or more before I have fully invested my $5,000. I will also be tracking my NAR every day and I will share the impact that defaults have upon a high NAR.
I wrote about my investment strategy for this account last month and here is the actual criteria on Lendstats where you can also see the estimated ROI of this investment strategy to date (as of this writing it was 13.06%). I have decided on this strategy after testing hundreds of queries on Lendstats and I will likely refine it slightly as time goes on.
What Are My Goals Here?
This is a Roth IRA that I intend to keep at Lending Club for decades. My goal with this account is for a real world return of greater than 12%. This will mean maintaining a Lending Club NAR of somewhere close to 13%. Why the difference? You should read my post about actual returns with p2p lending where I explain the reasons as well as show you how to calculate your real world returns.
The real goal here is to see if my strict quantitative analysis can produce an above average return. I rarely look at the loan descriptions, instead preferring to filter out the best loans to invest in based on historical performance. Of course, there is no guarantee that this will translate into higher returns, but I believe that it will.
Tax Free Interest with a Lending Club IRA
I have said it before and I will say it again. If you decide to invest in Lending Club, you should always choose the IRA option if at all possible. This way you will not have to pay any taxes on your interest income. If you are contributing to a 401k at work you can still invest in an IRA. If you are under age 50 you can invest $5,000 per year in an IRA, for those 50 and older the amount is $6,000.
I intend to contribute the maximum into my IRA every year. I hope and expect that when it comes time for me to retire I will have built up a substantial nest egg through the wonders of compound interest and peer to peer lending.
With that amount of money you should consider investing $50 per note instead of $25 in order to minimize the affect of LC’s service fees, which round to the nearest penny (and do not carry forward fractions of a penny like the distribution of borrower payments do).
On a $25 note, each payment is ~$0.60. this rounds up to the nearest dollar and LC takes a 1cent service fee from each payment, which works out to more like a 1.6% service fee.
On a $50 note, each payment is ~$1.20. this amount rounds down, and LC takes a 1cent service fee from each payment, which works out to around a .8% service charge.
-If you have 200 $25 notes, you will be paying $2 a month in service fees, $24 per year.
-If you have 100 $50 notes, you will only pay $1 a month in fees, $12/year.
This math is all estimated since the exact numbers depend on exact note details, but end result is you will increase your real return by around .25%. Its not a gamechanging amount, but its basically free money you are giving away when using $25 notes.
The only thing you give up is a bit of diversification. But once notes start numbering in the hundreds, I think that’s much less of an issue anyway. If you give me a choice between having 200 notes with .25% higher returns or 400 notes with .25% lower returns, I’ll go for higher returns.
@Brian, Interesting comment. All things being equal then based on your numbers there it makes sense to invest in $50 notes. But the numbers you quote: $0.60 payment for a $25 note and $1.20 for a $50 note seem based on 60 month notes only.
For 36 month notes the payments seem to average around $0.85 for a $25 note and $1.70 for a $50 note which means it really makes no difference for those kinds of notes.
With my IRA I am investing in a mix of 36 and 60 month notes although it is skewing to the 60 month end at the moment.
Then the issues comes down to defaults. If you get more defaults while the principal amount remains high that is really going to knock down the 0.25% off your return in one hit.
My feeling is that I will not move to $50 notes until after I have my 200 notes in place and then I may reinvest in $50 increments. With numbers of notes below 200 I feel you are relying too much on luck and you don;t have the law of large numbers working for you. I believe that is worth giving up the $12 a year.
Since you’re expecting a provocative statement/rebuttal from me I’ll try not to disappoint.
There’s no way in hell that you’re going to get a 12%+ real world return with just a 13% NAR or even a 14% …………..if you’re taking 3-4 months to get fully invested.
Let’s face it, 2 months into the game the guy who opened up a 5 yr. IRA CD at 3% on April 15th has already left you in the dust & it’ll be another month or 2 before you even catch up to his lowly 3% return. Of course his IRA is on autopilot & is FDIC insured, while your IRA is labor intensive & is backed up by the unsecured “word” of a startup & the word of the overstretched American consumer. I’ll let you off easy & won’t even get into my “defaults” spiel!
PS……….I know, I know, you don’t lend money to the overstretched. 🙂
@Dan, I don’t expect to earn 12% from the day I transfered my money in. If I was concerned about my short term gain I would have just dumped everything into a portfolio plan on the first day. This IRA came from a money market account earning 0.1% so I am not too worried about the short term. Once I am fully invested, which should be around September 1st, I expect to earn a 12% real world return. I will let everyone know when that day arrives so we can start the clock ticking.
I’m sorry but the clock started ticking on the day your money was no longer available to be invested somewhere else. If your “real world” returns are to have any meaning at all when compared to other investments while accounting for this period of “idle cash”……………….& not from the day you say you are ready to start counting. Otherwise it’s not a real world return & borderline disingenuous.
The bottom line is that your money sitting around earning nothing for 2-3 months is no different than distributions made to your account & sitting around before you re-invest. It is “idle cash”. Real world return is supposed to take this into account, which is the main thing that makes it different from NAR.
And you know all this Peter, which makes your suggestion of picking a different starting point all the more outrageous.
@Dan, I disagree with you on this point, simply because my real world return on this money was 0.1%. But obviously that could be deemed irrelevant and I certainly don’t want to be accused of being disingenuous by anyone.
So I will be happy to provide two numbers – one with a start date of the day the cash arrived at Lending Club and one with a start date of when I became fully invested. Because I also think it will be misleading to provide just the number you suggest. It doesn’t provide a real indication of what are the potential actual returns of p2p lending once you are fully invested. Both numbers I think will be of interest.
Elapsed time before your money starts making money is an integral part of EVERY p2p investment as it stands today. It’s not theoretical & it’s not just a one time event that you can conveniently fail to disclose.
10 months from now & going forward when you make your yearly IRA contributions you will go through this same time period of money sitting around earning nothing. People are interested in bottom line returns, not some finessed version of returns that looks good on paper but looks less good when they look at the real dollars & cents they earned. There’s enough “massaging” of the numbers in this investment class already.
@Dan, Point taken. I certainly don’t want to be accused of massaging the numbers. One of the primary goals of this blog is to dig behind the numbers to reveal the truth. I will make sure that I have complete transparency in all the details I share about my personal accounts.
While I appreciate everyone’s input, I think that beating dead horses gets really old. Peter is very upfront about what he is doing. Any intelligent investor understands that returns won’t be as high until the whole ball is invested, and given that a lot of us are in the same boat (pretty much 0.1% yield on idle money), I have no problems with Peter presenting in this manner. Each of us have different rates of spool-up, so trying to measure performance during spool up isn’t very beneficial.
@Larry, Thanks for chiming in and while it is true that any intelligent investor knows returns won’t be as high during ramp up one shouldn’t assume that every casual reader of the blog will be an intelligent investor. So, while I was reluctant at first, I think it is always best to err on the side of full disclosure.
Larry………I think you’re missing the point a bit here. This is an IRA account. I’d hardly consider a 0.1% yielding money market account to be a a reasonable alternative in an IRA. I mean seriously, how many people decide to have their IRA money earning 0.1%?
What I’ve been saying is that this IRA investment should be compared to other IRA investments such as an IRA CD or a fund investment or the myriad of other IRA options. In every case (short of a person who just willingly sits on cash), the money can be deployed immediately…………..in p2p it cannot. This shortcoming is NOT obvious or even known to most new p2p investors, to say nothing of potential p2p investors.
Furthermore, even if someone were to opt into a p2p IRA in an automated account like Lending Club’s “Prime” acct. , there will still be some sort of a non-interest earning period, albeit a much shorter one to the one Peter is experiencing.
And finally, I’m not suggesting that opening a p2p IRA is a bad idea. I’m saying that a real world (from date of investment) year in year out long term return of 12%+ is improbable at best…………..& I’m confident that time will prove me right.
Peter’s intent has always been to be upfront and honest about his experiences with P2P lending. I am sure that if his cash were earning 5% interest before moving it into LC, he would’ve taken the opportunity cost factor into account. The .1% interest will really not make that much of difference in his real world return on investment, assuming he is fully invested within a few months. Regarding LC’s service fees on $25 loans, I noticed that a while back, but I’ve decided the default risk outweighs the few dollars saved over the cost of a year, and have kept my new loans at $25. When I started out, I made a number of rather large loans (up to $800), just to get my cash fully deployed. Fortunately none of these have defaulted and are all current. I don’t recommend this approach to new investors, as one default on a large loan can really affect your ROI.
Mike……….It’s not the 0.1% interest he was getting or whether he’s being upfront or not that’s in question. Peter knows I’m not questioning his integrity or honesty.
So tomorrow you Mike open a IRA p2p acct & you take 2 months to deploy all your cash. Meanwhile I open a brokerage account to buy stocks tomorrow………………….but deploy my funds 4 months from now & Peter opens up an acct to buy gold & deploys all his cash tomorrow. How can we then fairly compare the return on these 3 accounts if we allow for 3 different starting dates? There has to be 1 starting date for the results to mean something in the real world……………..& the only starting point that would seem fair to all 3 in this example would be tomorrow. Or am I seriously missing something here?
Dan, you are correct in that all comparisons need to be done with the same start date.
@Dan/@Mike, As I said previously I don’t want to deceive or mislead even the casual reader of this blog. So, at least in the short term, if I share my results from this IRA I will show my actual ROI based on the date of transfer as well as the number from when I am fully invested. I feel like that will give the most complete picture.
Hey Brian, regarding the LC fees, I once spoke to LC about this and they told me that periodicaly they will make an adjustment to 1%. However, I’m on LC for nearly 2 years and never saw them make any adjustments, but I never call them because it’s just a small amount. If it’s a big difference in your account you should definitly call them to get an adjustment!
@Moe, Good point. I might mention this to Lending Club the next time I speak to them. Because if it $12/year as @Brian points out for 200 notes then for 1,000 notes it is $60/year. That is worth asking for an adjustment.
Peter, you could see how much they’re off in the “more details”, just take your total payments x .01, and look at the service charges in the “more details”, for me it’s off about $10.
On a different note, this week I received a letter from the IRA custodian, CAMA Plan, indicating a rate hike. I was going to contact LendingClub, but I thought I’d post here first, maybe to get a rise out of Dan. Also, Peter and any other IRA users, do you find it a huge pain in the ass to put money into the account? I hate the process and I fear my check will be lost in some black hole. It’s not 1986.
total off-subject question – is there a forum where we can ask questions and have discussions? I don’t want to thread-jack the comments, but I have some “how to handle LC profits on your taxes” questions, obviously not an IRA question.
Peter, I totaly agree with Larry that you should open a discussion forum.
That or have a monthly Open Thread post? Would love to make this site my “Home away from Home(LC.com)” for p2p lending info.
@ Jason; After receiving notification from CAMA about increased fees, I called them and was told that this increase didn’t apply to Lending Club investors, as LC takes care of our fees. Sounds too easy and simple, and I haven’t been overly impressed by CAMA’s customer service in the past, so I’m not convinced this is actually the case. Anyone else follow up on this with CAMA or LC? I haven’t added any funds to my IRA account since first opening it back in 09, so I can’t comment on current logistics, but I don’t recall it being that much of a pain. It would be nice if they would accept ACH, but I think they need a check in hand.
@Moe, thanks for the tip, I am off by $8.20 on my main account.
@Jason/@Mike, My understanding is that as long as you keep at least $5,000 in your account (or $10,000 after the first year then Lending Club will pay the fee. If you have less than that then you are probably on the hook for the increase.
@Larry, I think that is a good idea, I may start a forum at some point but in the meantime I think a q&a post is a good idea. I will get onto that. My goal is certainly to be a home for all things p2p lending.
Larry V
Try here:
http://www.prospers.org/forum/
Lou
@Lou/@Larry,
The prospers.org forum is certainly an option. There are some very smart people on there but they can also tend to be quite opinionated. Many investors there lost money on Prosper 1.0 and are very negative about peer to peer lending. But if keep all that in mind you can learn a great deal there, I know I have.
Testing to see if I can post a pic with html
guess not…