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| June Lake, CA in June, 2009 |
Certified Financial Planners are taught to shift to more conservative distribution of investments for clients as they get older and are faced with college expenses and retirement. This rebalancing typically begins in the late 40s or slightly later, depending on how old your kids are. Equity positions are sold, ideally locking in years of appreciation and funds are placed in instruments that deliver a fixed income while preserving capital.
I was presented with such an option last year, with college expenses 3 years away. Unfortunately, fixed income instruments at the time were yielding between 2% and 3% before tax on 3 to 4 year terms. Dismal. Not too thrilled about locking cash up at those rates and calling it ‘income’, I was on a prowl for alternatives.
I believe I caught a news blurb about Harvard Business Review’s pick of their Top 20 Breakthrough Ideas of 2009. I became intrigued by LendingClub and the peer-to-peer lending concept and opened a small $1,000 account to find out first hand.
I am a Schwab Private Client and at the next quarterly review, I asked them about LendingClub – I explained the concept and let them do some homework. They pointed out that in a portfolio diversification and liquidity were important considerations. I explained how LendingClub worked as best I knew how and highlighted that LendingClub allows fractional purchase of notes for as little as $25. At the $25 level, one could invest in 40 different loans with only $1,000 of capital. Loans range from Grade-A paying around 7% where borrowers have FICA scores north of 780, to Grade-G which pays as high as around 22% and borrowers typically have scores just north of 660 and every flavor in between. Diversification - done!
At a follow-up phone call with my advisor, I got an unofficial thumbs-up. Being that Schwab had not reviewed LendingClub at a corporate level, they were not in a position to ‘recommend’. However, since I had specifically asked for their oversight, they were able to ‘not object’ to including P2P as a part of my portfolio. They did suggest that instead of a taxable account, I should consider moving some of my retirement funds there. Liquidity - non-issue! I am now slowly depleting the taxable account.
With that ‘oversight’ in place – last December, I opened an IRA at LendingClub and transferred funds from my existing IRA after liquidating some equity holdings. Since then I’ve proceeded to build upon my ‘fixed income’ portion of my portfolio which currently has a Net Average Return (NAR) of 15.13%. My target is to slowly have LendingClub holdings become 30-40% of my fixed income piece. Since my account is only 7 months old, I expect for some defaults to begin showing up – if you look, there are 3 notes between 31 and 120 days late from a total of 605. The following charts capture the current state of my holdings at LendingClub:
If you discuss peer-to-peer lending in the context of fixed income with your financial adviser, do return and comment on this post. Heck, comment even if you don't!
