If you have logged into your Lending Club account today you will have noticed something new. Underneath your Net Annualized Return (NAR) number you will see a new link: Understanding Your Returns. This takes you to a brand new screen (just launched late yesterday) with some very interesting information.
Here is the graph I am presented with when I go to this screen in my main Lending Club account. I will explain this graph in detail below.
First we will deal with the purpose of this graph and then explain what we are looking at. Here is what Lending Club says:
The purpose of this chart is to illustrate how returns typically decrease over the life of an investment. If your account is relatively new, it is likely that your returns will decrease over time as some of your Notes become past-due and charge off. This chart is not a prediction of how your portfolio will actually perform and there are many factors that can impact your returns
A criticism that has been levied against Lending Club in the past is that they do not set investor expectations well enough. I hear this from new investors regularly. They are delighted with their 18% return and fail to realize that most likely this return will reduce to 8-10% as the account fully ages. This graph clearly shows a downward trend in NAR through at least month 18.
Here are some key points to help you understand this chart: [Read more…]