Putting New Money to Work vs Reinvesting

I have been thinking lately that there are really two kinds of investing when it comes to peer to peer lending. When you transfer money in to Prosper or Lending Club you have a large amount of cash waiting to be invested. Then once this cash is invested you will get repayments coming in regularly that will slowly build your cash reserves for reinvesting.

This difference is highlighted when you put in a large amount of money, say $5,000 or more. Now, staying diversified (at the $25 minimum) this will mean you will invest in 200 notes or more. But once you are fully invested, an account of $5,000 will only generate $50 – $100 per month depending on the terms of the loans in the portfolio. So you go from investing in 200 notes in one hit to reinvesting in around 4 notes a month. Clearly a different approach is needed.

When Investing New Money in P2P Lending

With new cash in your account you have to balance putting your money to work quickly versus refining your filtering criteria. With my new Lending Club Roth IRA, I started investing back in May and I am only two-thirds of the way towards full investment. I have decided I would rather take additional time to invest in just the specific loans I want rather than investing my money quickly. This money for the Roth IRA came out of a money market account earning 0.08% so I feel that I am not missing out on much by investing slowly.

I wouldn’t recommend the way I invest to everybody. Many new investors may not have the patience to take this much time to invest. In fact, if you are a new investor you could easily use one of the investing tools on Prosper (Quick Invest) and Lending Club (Portfolio Builder) that allow you to invest your money quickly.

If you want to put your cash to work this way then I would just choose some loan grades, depending on your tolerance for defaults, add the filter inquiries=0 (my favorite filter) and invest. Most new investors are excited to get started and with this approach you may well be able to put all your cash to work in one day.

For example, of the 785 loans on Lending Club at the time of this writing around half had zero inquiries. A similar proportion is available on Prosper. If you choose a couple of loan grades you can put your money to work right away and be fully invested in just a few clicks of your mouse.

Reinvesting Your Cash

Once you have all your cash invested in notes you can afford to be much pickier with your investments. This is when I recommend you spend several of hours on Lendstats familiarizing yourself with the various filters and their resulting estimated ROI. Then you can decide exactly which filters you want to apply to your reinvestments.

When you filter down the available loans with your new criteria you may well find more loans available than funds. In this case I would still stick with your $25 minimum investment (unless you already have more than 500 notes) and do one of two things. Refine your filtering criteria further or just read through the loans and eliminate some loans based on loan descriptions or questions and answers.

Of course, if you have a great deal of patience then I always recommend doing extensive research and understanding how to generate the best returns on your money. If you are happy to invest slowly you could take the approach that I do and be very selective on which loans to invest in from the start. You will likely end up with a higher ROI by doing this. And it will also mean you have a consistent portfolio of loans.

How have others done it? Did you invest your initial cash quickly or slowly? As always, I am interested to hear your comments.


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Jul. 28, 2011 6:56 pm

I was recently able to find quite a good number of notes on the trading platform, with buying existing notes you can become fully invested much faster, and even get them at a discount occationally. The downside is that the filter cababilties on the trading platform are very limited and you must check each note manualy, but if you have the time and know how to search you could find plenty of good notes there.

Dan B
Dan B
Jul. 28, 2011 10:05 pm

Peter………..If you really believe that a 500 sized portfolio will protect you from bad choices & deliver you a average return (as you stated last week), then what advantage is there to deploying money slowly with carefully selected filters etc. ? To improve on average perhaps?

Because you do realize that if 500 really is a number that is large enough to inoculate you from bad results & give you an average return……………..then that same 500 number is also large enough to make it EXTREMELY difficult if not impossible for you to outperform those same “average” returns. So what’s the extra time & effort for?

Charlie H
Charlie H
Jul. 29, 2011 10:26 am

500 notes “average” return
I think it depends on how you define average. Setting aside the issue of how you calculate your return….
Are we defining average as 9.6%?
Are we defining average as the average based on the grade of note selected?
Are we defining average as the average based on the lendingstats prediction of ROI?

For a large portfolio ($12,500 500 notes) with an average loan age of over 18months it is going to be hard to beat 9.6%. Especially since that 9.6% is calculated based on average younger loan age due to LendingClubs accelerating loan volume.

Lending Stats reports a ROI of 4.83% for all Lending Club loans. Average loan age of 11 month. I think it is possible to beat this through selective loan filters.

Jul. 29, 2011 10:46 am

“then what advantage is there to deploying money slowly with carefully selected filters etc. ? To improve on average perhaps?”

I suppose everyone who follows this method has his/her own answer, but mine is: 1) it’s FUN – why get in a huge rush? ….and 2) I am still learning.

When I first started with LC, I purchased a couple of “nightmare” notes on the Trading Platform that were bad purchases in every possible respect. THAT was an expensive lesson that may take me some time to recover from in terms of amount lost. But you can be darn sure I won’t make that same mistake again. And fortunately, it wasn’t money that I couldn’t afford to lose. I just didn’t want to lose it.

That reminds me. I think I’ll go reprice those notes and see if I can’t get something out of them.

Jul. 29, 2011 11:07 am

I don’t have much of a choice but to invest a bit slower. While I invest larger amounts per loan, there are still only a few loans per week that meet my criteria.


Dan B
Dan B
Jul. 29, 2011 3:35 pm

Peter………..I never said a 500 note portfolio wouldn’t protect you against a NEGATIVE return. It certainly should. And so should a 100 sized portfolio. So what?
But here’s something to keep in mind. Even using Lending Club’s liberal interpretation of returns & even at 800 notes, there is still a 9% of investors (or 1 in 11) end up doing AT LEAST 3.6% BELOW what they call their “average” of 9.6%. So clearly 800 wasn’t large enough to protect these guys. So you think 500 is adequate protection?

Dan B
Dan B
Jul. 29, 2011 11:12 pm

@Peter…………Agh, but didn’t you say that having a 500+ portfolio protects you regardless of the choices you make in setting filters &/or picking notes??
In fact I quote…………….”if you have 500 notes it doesn’t matter what criteria you use you will likely generate a positive ROI. You have the law of large numbers working for you – this negates the impact of bad luck and bad choices.”

So it shouldn’t have mattered if this group made mistakes or not……………..according to your theory. And incidentally, once you bring the portfolio size down to 400+, the under performing numbers rise to 12% or so. That’s almost 1 of 8.

All I’m saying is that considering that your chances of underperforming at 400+ notes is a very substantial 12% & underperforming at 800+ a not inconsequential 9%, it might be wise not to make any grand statements about 500 being some magical number that renders one immune from substandard or downright bad returns.

Dan B
Dan B
Jul. 31, 2011 2:56 pm

Peter………….But that 15% earning 12%+ is mainly composed of young to very young lenders whose returns have yet to be hit by defaults many defaults etc In other words, we don’t know where their numbers are going to end up yet……………..whereas the 9% that I pointed out are likely to be much older lenders who have already taken their hits…………..as evidenced by their weak numbers.

In other words, it’s likely that some, maybe many, of the 12% performers will see their numbers decline as time goes by…………….but it’s unlikely that a substantial amount of the underperformers will recover to postt even average returns.

Charlie H
Charlie H
Aug. 1, 2011 8:54 am

I would be happly suprised at a 9% ROI on a portfolio that has an average age of 18 month +

Lending Stats reports a ROI of 3.83% for all completed 36 month loans average age 36 months with a default rate of 16%. This I think is beatable.

Lending Stats reports a ROI of 4.83% for all Lending Club loans average age 11 months. This I think is beatable.

Using the Zero Inquiries filter on all loans gives an ROI of 8.95% with an average age of 9.7 months and a default rate of 1.5%

Changing the loan cut off to Aug-2010 drops the ROI to 8.47% with an average age of 16.7 months with a 3.6% default rate.

Changing the loan cut off to Aug-2009 drops the ROI to 7.28%% with an average age of 27.5 months with a 8.7% default rate.

IMHO an actual real return of 6-9% is realistic.

Dan B
Dan B
Aug. 1, 2011 11:14 pm

I think Charlie makes some “realistic” points. The 36 month completed & the 11 month old ROI numbers are very beatable.

On the other hand, Peter, most investors should be ecstatic with a 9% long term return.
Your 12-13% target? Short term? Absolutely, it’s been done by almost everybody with the risk tolerance…………… within their early months of investing.
Long term? Unlikely…………..Long term with 500+ notes? Even more unlikely…………..Long term with 2000 notes? Virtually impossible. Make me a liar!

Dan B
Dan B
Aug. 2, 2011 8:44 am

Peter………….Your 12-13% calculations are based almost entirely on the assumptions that you can consistently pick out the best borrowers today & project the lives & circumstances of these people for the next 3-5 years. And since none of us have a crystal ball, you’re making these determinations based on historical information from past borrowers with similar circumstances, credit scores, histories, etc etc. And I understand that you’ve played around with the numbers & have a set of parameters that have delivered the best returns in the past. All sounds very scientific & appealing.

The problem I see is that to hit 12-13% long term you’d have to hit the mark on pretty much all the filters you’ve picked out. Again it sounds very doable……….until one considers that you don’t really know that the filters will continue to outperform as they have in the past…………..simply because, in most cases, you don’t know why they’ve done well to begin with. You can only hypothesize. And to make matters even more precarious, the historical data available is still very limited. I mean you’re making some decisions with sample sizes of a couple of hundred. No offence, but that’s a bit of a joke.

Please understand that I’m not doubting your ability to get better than average returns. I’m doubting your ability to get MUCH better than average returns & with with a large number of notes no less.

Charlie H
Charlie H
Aug. 2, 2011 2:15 pm

In statistics, a spurious relationship (or, sometimes, spurious correlation or spurious regression) is a mathematical relationship in which two events or variables have no direct causal connection, yet it may be wrongly inferred that they do, due to either coincidence or the presence of a certain third, unseen factor.

Why do I mention this. Digging through the LendingStats data I have found many of these. This is normally due to the fact that when you start filtering the data you start to deal with a tiny number of loans (<200). When you dealing with small numbers, random chance can cause spurious relationship.

This will lead to filters that show high ROI because of RANDOM chance not because of the inherent likely hood of future borrowers meeting the same criteria will also perform.

This is why we need to do some REAL anaylsis of the data.

Charlie H
Charlie H
Aug. 9, 2011 4:07 pm

This P2P is a brave new world for indivdual investors. Check your inbox. 🙂