My experiment with peer-to-peer lending at Prosper.com continues, though I’m not quite as bullish on it as I was a year ago.
The platform has seen some impressive growth, both in terms of the number and volume of “originations,” and the number of lenders competing for the most attractive loans to lend on.
I’m still using Lending Robot to automatically deploy idle cash in my account, but I actually started to withdraw some earnings in 2016, where up to this point I’d pretty much reinvested everything.
Most defaults happen early in the repayment cycle, so the seasoned number only is a more accurate view of the potential long-term returns. In my case, since the account has been open for such a long time and the lending strategy has been similar over many years, the seasoned and “all notes” returns are almost identical.
The loan performance for 2016 was pretty comparable to the last few years:
I used the NickelSteamroller historical performance data to try and dial in the risk factors that had the biggest impact and the highest returns.
Returns by Loan Grade
Take a look at my returns by loan grade (the lower the grade, the riskier the loan):
And here’s what Prosper says are the average returns by loan grade.
Gotta feel good about “beating the index,” right?
My Investment Strategy
Because of the markedly higher returns among the lower-grade notes, I’ve tried to skew my portfolio toward those. If E and HR notes have the best returns, why not just invest in them exclusively?
Because there aren’t that many available. Or rather, there aren’t that many available that also meet my Nickel Steamroller filters.
As I’ve pretty much stopped buying A, B, and C-grade notes, over 85% of my loans are now rated D, E, or HR. (This is a high-risk, high return strategy, but it’s intentional.)
I invest $25-50 per loan to make sure I’m diversified on the platform and am not out too much if any one note defaults. (More on chargeoffs below.)
In total, 10.9% of my loans have defaulted, and another 9% of the active notes are currently delinquent.
One drawback to peer-to-peer investing is that you are limited in the amount of loan chargeoffs you can deduct from your investing income each year on your taxes. As it stands now, my understanding is that you can only claim up to $3000 worth of chargeoffs per year.
After that, you’re probably better off investing in other assets, or switching to a peer-to-peer portfolio with less risky notes. You can track your chargeoff total by monitoring your monthly statements from Prosper.
Cash Flow by Month
But here’s where things get interesting / confusing to me. While the percentage returns look great, my monthly cash flow tells a different story.
I started tracking cash flow a couple years ago as part of my passive income goal. This figure includes payments received less chargeoffs.
- January $174.28
- February $233.3
- March $244.85
- April $328.19
- May $292.59
- June $130.82
- July $309.6
- August $191.44
- September $208.76
- October $27.85
- November $-42.49
- December $116.67
- January ’17 $-61.44
- AVERAGE $166/mo
The monthly cash flow is down about $65 per month on average compared with last year.
I’m really not sure the cause of this. I saw a sizeable spike in chargeoffs in the second half of 2016 that continued into January of this year.
This long-term view of the account is actually helpful for me to look at. Even with the recent dip, this investment vehicle still is a great dividend engine that earned over $2000 last year.
One possible explanation for the recent decline is I have fewer new notes at the top of the repayment cycle (because I invested less in 2016 than in 2015), and as the portfolio ages I’m seeing a marked increase in the percentage of delinquencies.
For that reason, I’ve begun withdrawing some of the cash my Prosper account spins off, which will probably make the problem worse in the near-term. Do I have a fistful of toxic loans in my portfolio? It’s possible. My hope and theory is the loans will stabilize this year and get back to a more consistent positive cash flow.
I’m tracking the performance a little more closely now, and also evaluating some new alternative investment platforms to play around with.
For me, this is about buying cash flow. If you look at it that way, you can begin to evaluate the different investment opportunities on a level playing field. How expensive is each dollar of return in terms of the cash you need to “buy” it and the risks involved?
My initial investment was allocated automatically across a diverse portfolio of loans of all grades. No other filtering criteria was used.
Turns out, that’s not the smartest way to do peer-to-peer investing. Since then, I’ve started to use some of the filters available to hand-select the ones I think will perform well based on my default study and some historical data made available on sites like Nickel Steamroller.
Even if you went after lower risk loans, you could still earn a healthy 5-10%. Not a bad way to put some excess cash to use if you’re looking for an alternative investment.
I haven’t yet opened an account at Lending Club, Prosper’s primary competition.