If you’ve been following along, you know that I’ve been performing a bit of an experiment. I’ve been taking 10% of my earnings from this and other online ventures and splitting it evenly between Lending Club and Sharebuilder accounts. The idea was to see what kind of returns I could get from the two, and to test for stability. I’ve been running the experiment for a little over 6 months now, and I’m calling it done. The difference has been so drastic, that I don’t think there’s any point in running it any longer.
In short, Lending Club is kicking Sharebuilder’s butt. Really, the only thing that the Sharebuilder account has going for it is that the chance of default on any of the investments is extremely low. So, I suppose that it is possible that in 5 or so years, the gains on the Sharebuilder account could potentially be better. However, as I’m about to show you, the short term results are strongly in Lending Club’s favor.
My Lending Club Returns
As of today, Lending Club is telling me that I’m seeing a return of 13.15% on my account. My Sharebuilder account is currently reporting a return of -16.42%. It doesn’t take a math major to come to the conclusion that Lending Club is performing far better. To date, with a bit over 2 years of total history, I haven’t had a default in my Lending Club account. I’m pretty sure that has more to do with just getting lucky, than with any effort of my own. Some other interesting numbers, besides the return: The portfolio has grown enough that it brings in enough in principle + interest payments to reinvest monthly now. The monthly interest gains, as of the end of March, have now exceeded $4 monthly. It’s not much, but it’s been fun watching that number grow.
My Lending Club Portfolio
When I first started out investing in my LC account, I was investing in mostly A, B, and C investments. I’ve recently shifted that to be mostly C and D investments. Why? Well, as I mentioned in my post on selecting Lending Club investments, I have to purchase my investments through their trading platform rather than directly invest in the loans. What that means is that in most cases, I have to absorb a small percentage of profit to the original investor. So, a loan that has an actual interest rate of 14% might only return 11% to me because I bought it at a higher price than what it was worth in principle at the time. Because of that, I have to invest in the higher grade loans in order to maintain a higher return rate. But, I’m OK with that. Even the worst graded loans that LC has are still well above what a traditional bank or credit union would lend to. And, at less than $25 per investment, I can afford to take the risk. I’ve diversified the account so that one or two defaults isn’t going to destroy the account. Sidenote: If you can buy your LC loans directly, I suggest you check out Peter at SocialLending.net’s post on how he’s investing in 2012. He’s got several filters and some interesting insight into how he’s set up his investing that are worth the read. They’re somewhat useless to me because of the way I have to invest, but will be useful to someone who can invest directly.
Lending Club, Going Forward
With the end of the “experiment”, I’m now putting the full 10% that I had been splitting into my Lending Club account. The overall total for the account is still at less than 3% of my overall investment portfolio (including retirement investments), but it is growing. At some point, I’ll have to decide if I want to continue to add to the account or not, but with the returns that I’m getting, and the luck I’ve had in the default area, I can’t see wanting to stop investing in the account.
Have you given Lending Club a try yet? How have your returns been? What’s your default rate?
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BB, Thanks for the link and congratulations on such excellent returns. This is a good lesson to those people who think they can’t invest because Lending Club is not in their state. There are only five states (OR, KS, OH, VT and MD) where Lending Club allows no investors. Some big states such as TX, NJ, MA and PA allow investing via the trading platform and as you have shown with a little extra work there are some great returns that can be achieved.
Hi Shane, My prosper peer to peer account is showing annualized returns of around 12% since October. I am very happy with this platform. You can’t really compare Share builder and peer to peer, it’s like comparing investing bonds and stocks, they are two different types of investments. But diversity is usually a good thing.
Congrats on your great returns! I’m about 15% negative right now because I was unlucky enough to have somebody default. Oh well.
Those are some great returns up there but what stands out is the word “lucky” you used to describe this investment. I have never tried the lending club so you are providing an interesting insight.
@Peter Thanks! Yes, just because you can’t invest directly, doesn’t mean you can’t get some good returns out of the system.
@Barb No, it is a bit like comparing apples to oranges because of the way it’s structured. But, for this experiments purposes, it served to compare.
@Brian Yeah, I’ve been lucky to not have any default yet. It’ll happen, I just hope it doesn’t for a bit longer.
@BeatingTheIndex Absolutely. I’m lucky in that I haven’t had any defaults yet. They’ll come, I’m fairly certain, but the longer I go without the luckier I feel! 😉
Congrats on the performance of your portfolio. Like you, I’m limited to the secondary market on Lending Club, which certainly has its own challenges. But, I do like that out of the gates I was forced to start understanding how to find deals on FOLIOfn. Purchasing seasoned notes with proven payment history at a reasonable price seems to be paying off so far. Just be sure to calculate your ROI using XIRR in Excel based on your monthly statements to compare with the NAR LC is showing on your account page. Peter’s site has a good post on how to do this titled Five Ways to Measure Your P2P Lending ROI if you need a reference.
Interesting experiment. I’m curious to what your Share Builder was invested in…no dividends?
How do taxes work with Peer to Peer? 1099’s?
I’m considering Share Builder because they have BRK B as an option.
@Brady I’ve seen Peter use the XIRR on his spreadsheets, but haven’t really done too much in the way of analysis that way on my own stuff. I do need to though.
@Brent The ShareBuilder stuff is exclusively invested in dividend paying stocks. There’s one stock that took a nosedive shortly after I bought it. Call it poor research or just bad luck, but it’s dragging the rest of the portfolio down with it. The other factor in the Sharebuilder account is the transaction fee for the trade. When you’ve only got a <$300 account, it's very hard to diversify like I do in lending Club while not taking it in the shorts with a $4 fee for every transaction.
Yea, that $4 a pop is nasty. Did you use the coupon for your free trade on your birthday? What about investing quarterly instead?
@Brent I wasn’t aware that there was a coupon for a free trade on my birthday. I’ll have to look that up. After the initial few trades, I started on an extended timeline. Instead of waiting until there was 25-30 to trade with, I waited until there was closer to 60. That’s the smarter way to do it when you take into account the fees, but makes it harder to diversify broadly.