P2P Lending Posts Positive Returns Compared to Many Asset Classes

Interest rates, the stock market and the effects of China on our economy have been all over the headlines as of late. August in particular was a bad month for the stock market, but what about other asset classes? Just last week we happened upon a tweet by Cullen Roche stating:

This is kind of amazing. Every single major asset class has negative 1 year returns.

It was accompanied by the below image, which shows tickers for all of the major asset classes including stocks, bonds, REITs, commodities and US TIPS. The returns of each of these for the year ending September 11th was negative.

Comparing-P2PLending-AssetClasses

I recently wrote about marketplace lending and stock market volatility, but the data above is not limited to the stock market. Although there may be some similar funds that have a positive return, the point here is that the public markets are increasingly correlated. When one asset class goes down, they all can perform poorly. For those of us investing in Lending Club and Prosper, data like this certainly makes p2p lending look more appealing.

Now if we were to go into a recession, it is very likely that your p2p lending returns will decrease and possibly even go negative if we have a deep recession. However, we are not in a recession, in fact the economy is still chugging along reasonably well but the public markets tend to react with fear whenever some kind of bad news hits – whether it be a possible China slowdown or a Federal Reserve rate hike. P2P lending returns suffer no such volatility – as long as unemployment rates stay steady and we don’t actually fall into a recession p2p lending returns are likely to remain stable.

I looked at both my Lending Club and Prosper statements over the same period to see what my returns have been to compare. Keep in mind that my returns shown below are still probably higher than what they will be once my account has fully aged. I expect both accounts to fall within the 9% range.

Lending Club Results 8/31/2014 – 8/31/2015

  • Average Age: 13.8 Months
  • Average Interest Rate: 17.57%
  • XIRR Return: 10.5%

Prosper Results 8/31/2014 – 8/31/2015

  • Average Age: 10 Months
  • Average Interest Rate: 17.12%
  • XIRR Return: 13.5%

These results are typical for a Lending Club and Prosper investor. In our diversification post, we showed that every single Prosper investor since July 2009 with more than 100 loans has achieved a positive return. Lending Club states their number to be 99.9% of investors.

I own a wide variety of index funds similar to the ones shown in the 1 year performance image above including US Stocks, International Stocks, Bonds and REITs. My overall portfolio is down 9.5% since last year. I am personally okay with seeing losses as I have a long investment horizon. I refrain from trying to time the market, but not everyone can do so. It seems that an investment like p2p lending may help people from selling their investments when they are down, something that has been proven over the long term to be a poor investment decision.

Seeing some volatility in the market as of late has given me more confidence in my decision to invest in both Prosper and Lending Club. It is nice to know that although I have paper losses elsewhere, I still have p2p lending accounts with a positive return that are providing consistent cash flow.

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Hrant
Hrant
Sep. 17, 2015 9:19 am

Bravo Peter again for showing the actual, not regression analysis results, but with actual numbers, of P2P returns, versus other investment choices.
As some of you might know, I have also been an investor in this field since 2009, and am very happy with the net results attained. Furthermore, am increasing positions in this field consistently, making it a larger portion of my overall portfolio as a long term investor thru LC, and funds like NSR Invest, to cut down on time spent perusing loans..
Thank you as always.for bringing full transparency to the industry, and being in the forefront of this nascent marketplace lending field, since the beginning days, as the “go to” source.

Ryan Lichtenwald
Ryan Lichtenwald
Sep. 18, 2015 9:06 am
Reply to  Hrant

Thanks for the feedback, we appreciate it!

James Wu
Sep. 17, 2015 12:11 pm

Ryan:

The double-digit returns for both your Lending Club & Prospers accounts surely illustrate the return premium that marketplace lending has offered the past year.

However, the author of the tweet neglected to take into account the dividend yield of the referenced exchange traded funds. This makes the comparison unfair.

If a retail investor purchased BND a year ago & reinvested each of their dividend payments, then total return today would actually be above 2%. (https://www.etf.com/BND)

While not a spectacular as your returns in Lending Club & Prosper, an appropriate return for broad market exposure in US Fixed Income.

I still agree with your point despite the total return of the underlying ETFs not all being negative for the year. An investor would have been better off with an allocation in peer-to-peer loans.

The performance of MPL further justifies the principles of holding a well-diversified portfolio across many different asset classes.

It’s really nice to see asset class return comparisons – and the genuine outperformance of MPL will attract more investors into this burgeoning asset class.

Look forward to seeing more analysis of this type as marketplace lending grows & matures.

Ryan Lichtenwald
Ryan Lichtenwald
Sep. 17, 2015 12:44 pm
Reply to  James Wu

Hi James,

Thanks for pointing that out. When I was verifying the returns that were posted, I did not include dividend reinvestment. As you mentioned, it still shows the superiority of an investment in Lending Club or Prosper over the last year. We plan to do more analysis on what happens in different economic scenarios to a p2p lending portfolio.

MR
MR
Sep. 17, 2015 1:03 pm

What are investors in P2P’s loss expectations during a recession? I have no doubt they are generating good returns now but I suspect losses for P2P investors will be much worse next recession than last and one can only wonder how much the marketplaces blow up when this happens.

Ryan Lichtenwald
Ryan Lichtenwald
Sep. 18, 2015 8:59 am
Reply to  MR

This is a topic that is on our list to cover. We will draw some expertise from our credit expert at NSRInvest to get an idea of what might happen during a recession.

SamS
SamS
Sep. 17, 2015 3:07 pm

This post is simply wrong are so many levels..

“It seems that an investment like p2p lending may help people from selling their investments when they are down, something that has been proven over the long term to be a poor investment decision.”

Ummmm perhaps because they are illiquid?? I am just going to stop there.

Ryan Lichtenwald
Ryan Lichtenwald
Sep. 18, 2015 9:04 am
Reply to  SamS

I was alluding to the fact that someone with a stock/bond only portfolio may be more prone to sell due to all of their investments being down. If an individual has a slice of p2p lending in their portfolio which is performing well, they may be less likely to sell their stock positions while their portfolio is down. I know for me personally it makes me feel better about my portfolio to not see everything down.

Lynn Simon
Lynn Simon
Sep. 21, 2015 10:09 pm

I live in NJ. Is there any way to participate in the investment at all? please advised.

Ryan Lichtenwald
Ryan Lichtenwald
Sep. 23, 2015 7:32 am
Reply to  Lynn Simon

Hi Lynn, as a New Jersey resident you can only participate in the secondary market on Lending Club. However, Lending Club just added three more states and it is possible that lending will be available in New Jersey soon.