Order Complete; All Notes Issued... (Part 1)

O'Shaughnessy Dam at Hetch Hetchy, April 2010

     I didn't like when I received notification that of the notes I had picked a certain number didn't issue and the funds were returned for re-investment. It felt like being cheated of the time I had spent picking them. I have since developed a workflow and filters that have made the "Order Complete; All Notes Issued..." email a more frequent occurrence.
     Admittedly, my LendingClub portfolio is young - only seven months for my IRA - and eleven for the original trial account, hence caveat emptor - what I'm about to share are my ideas and methods and represent my risk profile. Yours will be different - guaranteed! I hope as a LendingClub investor, you, the reader, will be able to adapt or outright reject some of the ideas presented.
     I wrote about how I was able to justify moving a portion of my IRA to LendingClub in my post: Peer-To-Peer Lending in a Balanced Portfolio: Justified!. I made that commitment after familiarizing myself with the goings on and workings of LendingClub and the process of “note-picking”. In my trial account I allowed myself latitude including the use of automatic selection tools and kept these notes in separate portfolios to keep track. Several excellent webinars organized by LendingClub for investors were a big help. The one I got the most out of was by Scott Langmack in October, 2009 entitled, "Higher Returns Through Diversification". Watch the webinar if you are new to LendingClub. I particularly liked his personal thoughts on hand-picking notes as part of the Q&A session exactly 37 min into the presentation. What I have to say here is just once instance, you’ll serve yourself well by browsing through Scott Langmack's website, reviewing the vast investor information he has placed for public consumption.
     The charts below are a snapshot of what my IRA looks like today:

Ever since LendingClub introduced 60-month notes, I've preferentially purchased them and they now make up 34% of my holdings. 60-month notes provide a premium in rates for the same borrower risk profile. The portfolio note composition, as of this writing, with 621 notes is as follows:

• In Funding - 7
• Issued & Current - 597
• Fully Paid - 11
• Late 16-30 days - 3
• Late 31-120 days - 3
• Default - 0
• Charged Off - 0

     On the other hand, my trial account looks like:

No 60-month notes in this account and you can see, it is seeing it’s fair share of defaults, 3, and five are on the brink from a pot of 182, while the IRA has 3 notes on the brink in a pot of 621 – let reiterate, my portfolios are young and I expect more defaults. I am hoping I am able to stay below the 3% LendingClub lifetime default rate average across all notes. The fact is: loans do go bad. Hence, the importance of diversification – what better way than to lend to hundreds of borrowers? LendingClub makes it easy to do with just $25 per note. It’s a whole lot safer than lending to a friend – if that loan goes bad you lose both money and the friend!
     I am still hand picking each note – on first blush, it may seem like too much work – and it was, before I got myself a workflow. Now I spend between 5 and 8 minutes any time I want a break to run a bunch of filters, eye-ball some ratios and finally scan the Q&A section of the offering. My basis for the fraction of the note to be purchased remains nebulous – and I just go with my gut – buying in from $25 to $250 chunks with only a couple on the high end. With this methodology, I have been able to achieve a purchase volume ranging from a low of 39 notes to a high of 102 notes in a month with weighted average monthly portfolio rates between 14.5% and 16.12%. The entire portfolio comes in around 15%.
     Ouch, this post is getting long... in my next write-up, I will go through my filters and subjective criteria. Consider following this blog so you know when it is published and do comment! Happy P2P-Lending!