Investor Junkie » Alternative Investments

Improving Your Lending Club Returns

Larry Ludwig — Thu, 10 May 2012 01:07:13 +0000

I’ve been a Lending Club investor since July 2009. In the three years I’ve been doing P2P investing, I’ve learned a lot since I first started. Some of lessons you see discussed with my quarterly updates, but not comprehensive enough for someone new to peer-to-peer lending.

When I first started investing with Lending Club I was forging new ground. Not many others had done this before, nor were there many online resources, or others you could turn to for advice. For the most part, I did pretty well with my Lending Club investment. I’m earning close to 10% APR, though I did make some mistakes along the way. It would have been great to have found a mentor to help guide me along the way. To a beginner, investing in Lending Club can be a little daunting.

Since I’ve been very transparent with my Lending Club investment, I’ve had many ask me how to invest. The most common questions I get: “How can I get started?” or “I’m already with Lending Club, how can I get better returns?”. I’ve always wanted to create an online course for peer-to-peer investing, but never had the time to focus on such an endeavor.

P2P Lending Wealth System Course

Fortunately someone has filled this much needed niche. Peter Renton from the Social Lending Network blog, created the P2P Lending Wealth System. It’s the most comprehensive P2P investing course I’ve seen anywhere.

Peter created this course last year, and just updated it for 2012. If you don’t know Peter or his web site, he’s an authority in the P2P investment arena. He also walks the talk. He’s an active investor with both Lending Club and Prosper, and has five figures invested in each P2P lender. He’s a seasoned investor that can you get started quickly, and help get a decent return.

Order the P2P Lending Wealth System Now

Peter’s course discusses:

Intro and background to P2P investing of Lending Club and Prosper
The Risks with P2P Lending and how to minimize defaults?
Maximizing Your ROI with Lending Club and Prosper
Insider tips to research and taxes

The over four hour course is in online web video format, and walks you through every step of the investing process. The course is perfect for investors just starting out, but also includes advanced topics that will even help the seasoned P2P investor.

I’ve personally reviewed the entire seminar, and without question endorse this product. I can honestly say, even a seasoned investor like me, I even learned a few tips and tricks that will improve my returns.

For someone just starting peer-to-peer investing, the course is well worth the cost. It will help ensure you get a decent return with Lending Club. The course not only discusses Lending Club, but also the other peer-to-peer lender Prosper.

I don’t have any direct experience with Prosper’s 2.0 lending process yet. I plan on investing and reviewing Prosper in the coming months. This course will help me get a head start investing with Prosper.

Peter is running a special on the course until the end of May 2012 for $97. After May the price will go up to $147, so I suggest you order it now.

Order the P2P Lending Wealth System Now

Lending Club (April 2012 Update)

Larry Ludwig — Thu, 05 Apr 2012 13:29:50 +0000

Time for another Lending Club update. As of today my return is 9.96% NAR, $7,383.95 invested, and over $1,220 in interest. I have over 360 active notes. Since my last update, I now have ten charged off loans, five 31-120 days late notes, and two 2-30 day late notes. The defaults have changed my return to from the previous 10.61% NAR reported in January 2012.

Since my last update, I have updated our Lending Club promotions web page. You may want to check them out, if you still are on the fence about joining Lending Club.

Next Steps

With the low interest rates and another five year CD maturing, I plan on adding another $1,000 to my Lending Club Account. I plan on getting to $10,000 total invested with Lending Club as my limit. Once I reach that point I might reinvest the profits, or just let it wind down taking the profits into other investments. Keep in mind my Lending Club account is taxable, and taxed as regular income (boo!). As rates are expected to increase next year, my profits will decrease from this. So I may entertain the idea of opening an IRA account to defer taxes. Lending Club and Prosper are definitely not tax efficient.

Since the last summary I have created a new tracking portfolio within Lending Club. I’m doing this to track changes with my loan selection process, and see if the performance turns out any better. While I’m more than happy with my current returns, I’ve made some new distinctions. From my quantitate analysis of Lending Club data, I have adjusted some filters that should increase my returns. I’m curious if the changes will lead to better returns. So far yes, but it’s way to early to tell. In the past month I’ve had a tough time finding notes that meet my filter requirements, hence why you see a decent amount of cash in my account. I suspect this will change as the previous two months I had no issue finding notes. If anything, I was able to pick the best notes at the same return rate.

Come the end of June, I’ll be with Lending Club for three years. I might end the quarterly updates, as I’ve gone through a full three year lifecycle and documenting my performance.

Readers: Would you like to see my quarterly updates to continue? Would you like to see any topic related to Lending Club discussed that I haven’t done previously?

Are Your Collectibles Really an Investment?

Miranda Marquit — Mon, 02 Jan 2012 17:18:24 +0000

How many times, have you heard as a justification for buying something, this excuse: “It’s a collectible! In a couple of decades it will be worth something!”
While it’s true that some items do increase in value over time, and some collectibles can provide you with a decent enough return as an alternative investment, chances are that those items labeled “collector’s” by the company trying to sell them aren’t going to be worth much down the road. In fact, even if you keep them in mint condition, they might be worth less than you paid for them.

Trend Collectibles

One of the biggest problems with trying to make money of collectibles comes when you try to cash in on a trend. Remember the Beanie Baby toys? At the height of the craze, when they were must-haves, prices spiked. But now you can get them for as little as $0.99 if you know where to look. Some of the “exclusive” versions, and some others might go for more, but you can usually find most of them for much less.

If you were desperately paying $20 for a Beanie Baby back in the day, you are probably disappointed to realize that your “investment” has lost value. These types of mass-produced trend “collectibles,” which include Precious Moments figures, Hess trucks, movie action figures (my husband loves Lord of the Rings figures) and other similar items, probably aren’t going to hold their value down the road — much less fund your retirement.

What Makes Collectibles Valuable?

Part of the reason some collectibles are valuable is due to their scarcity. Something mass produced in our day and age isn’t likely to turn into some rare collector’s item. Some of the qualities of valuable collector’s items include:

Age: The older something is, the more likely it is to be valuable.
Condition: Even something old isn’t likely to be worth as much if it is in poor condition. The better condition something is in, the more valuable it is likely to be.
Scarcity: Of course, something rare enough, even if the quality has deteriorated, can still be worth something. This is seen often in certain coins, as well as some other items.
History/Authenticity: The history of an item might render it a collectible, as well. There are certain swords, mass-produced during the Civil War and used by grunts, that aren’t worth all that much. However, an officer’s sword of certain design, fetches more. Make it a famous general’s sword, and you have an item that could be worth a great deal indeed. The history of an item — who used it — can add value. A set of George Washington’s false teeth are worth more than a set from the same time period used by a nameless man.

If you look at those factors, it becomes fairly obvious, fairly quickly, that most of the “collectibles” produced today for that purpose probably won’t fetch all that much down the road. If you’re going to collect such items, you might want to do it as a hobby, for the enjoyment you receive from it, rather than expecting to rely on them for future wealth.

Lending Club (January 2012 Update)

Larry Ludwig — Sun, 01 Jan 2012 14:22:19 +0000

Here are my current Lending Club results. As of today my return is 10.59% NAR, and have $7,264.59 invested, and almost $1,000 total in interest. I have over 340 active notes. Since my last update, I now have six charged off loans, and currently seven 31-120 days late notes. The increase in defaults obviously decreased my return from the previous 11.31% reported in October 2011.

It’s interesting to note if you look closely at the above screenshot, and my previous the “compare” link is no longer available. Lending Club removed this feature sometime in mid-December. You no longer can compare your performance to other Lending Club investors. I kind of liked this feature, but understood it was somewhat flawed. Peter Renton of the Social Lending Network has a post discussing the change in more detail.

For those who care, you can still access the comparison page by entering this URL:

https://www.lendingclub.com/account/lendersPerformance.action

You must be logged in already to be able to view this page. I’m in the 56% Percentile, and still above the 9.64% NAR.

Lending Club Refer A Friend Promotion

Get $300 when you start investing with Lending Club. To qualify, you must open account by selecting the button below and depositing $10,000. See their web site for more terms and conditions.

Get $300 When Signing Up To Lending Club

Portfolio Analyzer

Fellow blogger Nickel Steamroller has a great portfolio analyzer tool.

http://www.nickelsteamroller.com/portfolio

This tool will help determine ROI, which is slightly lower than NAR. In my opinion ROI should be used so you can accurately compare your returns with other investments. The ROI for my portfolio is 8.95%. It also gives the average age of the loans, which in my case is 347 days. The analyzer also gives a recommendations of which notes you should sell or keep.

Investment in Physical Gold?

Miranda Marquit — Wed, 23 Nov 2011 12:56:00 +0000

Gold seems to be all the rage these days — especially physical gold. Whether you are investing in gold coins, or whether you are investing in gold account, receiving a record of numbered gold bars that belong to you, it’s important to understand the challenges that can come with investing in physical gold.

While physical gold can be a way to diversify, and it can provide you with a solid, tangible asset that might be able to help you when times get tough (or if you believe it’s only a matter of time before the U.S. dollar is completely worthless), it’s important to think through your decision. As with any investment, it’s important to consider the drawbacks associated with investing in physical gold:

Where Will You Keep It?

If you invest in physical gold, you have to figure out where you are going to keep it. Do you have a big fire safe at home where you can stash your collection of gold coins? Perhaps you are keeping your gold in a safety deposit box at the bank. In either case, your gold is vulnerable to theft.

Of course, you might not have the means to store the gold yourself. Some people prefer to use pooled accounts to help them store their physical gold. Your gold is in a vault, either numbered by bar or coin specifically to you, or you have a record of a sum of gold (unallocated) assigned to you. In the case of an allocated account, you usually have to pay a storage fee and an insurance fee. With an unallocated account you don’t have to pay as many fees, but the gold might remain in the name of the company; you are at risk if the company goes out of business and creditors get the gold.

When you store gold on-site, you have quick access to it, but it might be more vulnerable to disaster and theft. Store it off-site, though, and you might not get access to it when you want it.

Premiums and Taxes

Another issue with physical gold is that you have to consider the premiums and taxes. Usually, you pay a premium when you buy physical gold, meaning it is marked up from the market price. Premiums are usually less with pooled accounts, but they are there nonetheless. This means that if the gold loses in value (perhaps it is a bubble that will burst), you not only see costs in terms of losses, but the premium you paid to buy physical gold increases your losses.

Realize, too, that gold is taxed as a collectible by the IRS. Right now, that means that you pay a 28% capital gains tax if you decide to sell your gold for a profit. If you purchase gold stocks, though, you pay the “regular” capital gains rate; you don’t have to pay the collectible rate (although you do if you invest in a gold ETF).

Alternative: Gold Jewelry

You can avoid many problems associated with investing in physical gold with the help of jewelry. Gold jewelry is not considered a collectible, and sales of your “heirloom” pieces don’t have to be reported for income tax purposes. Jewelry is portable, and easy to store (although theft can still be a worry).

For some, the financial security of gold as a tangible asset, and something of “objective” worth, outweighs the costs now. And, really, it depends on your goals and motivations. But, before you purchase physical gold, make sure you understand what you are about to do.

Lending Club (October 2011 Update)

Larry Ludwig — Fri, 14 Oct 2011 23:16:21 +0000

Another three months, and another Lending Club update. I’m now past the active 300 note club, and hopefully on my way to the 900 note club. Current NAR is 11.31% or 0.01% lower than the last reported summary.

The most noticeable change since my last update is an increase in late notes in the 31 – 120 days range. I suspect all of these loans will eventually default. The economy is still in the pits, and until recently I was 100% sure we were/are going into a double dip recession. At the moment based upon my business is picking up, I’m not so sure at the moment. Either way household are still very stressed at the moment, and any minor change in the economy can drastically affect them from paying back unsecured debt.

You may notice an usually high amount of cash available in my summary. I just added another $500 from a matured 5 year CD that was getting 4.75%. I’ve lost all hope in CD returns to even come close to matching the CPI inflation rate. So I’ve been adding a little to Lending Club, but much more in corporate bond funds and a Ginnie Mae fund.

Peter Renton of Social Lending Network recently did a guest post for me about Lending Club vs Prosper. I’m personally still not a fan of Prosper, even after their changes in lending. It’s great they adopted more like Lending Club, but still don’t think their returns justify their risks.

I update my Lending Club portfolio on a quarterly basis.
View my Lending Club Investments archive.

Lending Club vs. Prosper

Guest Author — Tue, 11 Oct 2011 13:56:36 +0000

Investors looking to take advantage of the great returns offered by peer to peer lending have two choices: Lending Club and Prosper. Both offer excellent potential returns for investors but they do operate differently. What follows is a guide that will help investors understand the differences between these two companies.

Prosper was the first p2p lending company to launch in February 2006. This was during the boom times of the early 2000’s and they quickly gained a large number of investors and borrowers. Lending Club (see review of Lending Club) launched eighteen months later in mid 2007 on Facebook originally, and today they remain the only two real choices for investors.

State Availability

The first thing for p2p investors to consider is whether or not p2p lending is available in their state. Even though both Lending Club and Prosper are regulated by the Securities and Exchange Commission (SEC), it is still up to the individual states whether or not to allow these companies to solicit for investors in their state.

Lending Club

Lending Club is available to new investors in the following states: CA*, CO, CT, DE, FL, GA, HI, ID, IL, KY*, LA, ME, MN, MO, MS, MT, NH, NV, NY, RI, SC, SD, UT, VA, WA, WI, WV, WY (California and Kentucky have additional requirements for new investors).

However, there is an additional list of states available for investors via the Lending Club trading platform. This is where investors trade in existing loans and this has a much broader acceptance with the states. The additional states available here are: AK, AL, AR, IN, IA, MA, MI, NE, NJ, NM, NC, ND, OK, PA, TN and TX.

Join Lending Club

Prosper

Prosper has a slightly different list of states available for new investors: AK, CA*, CO, CT, DE, DC, FL, GA, HI, ID*, IL, LA, ME, MN, MO, MS, MT, NV, NH*, NY, OR*, RI, SC, SD, UT, VA*, WA*, WI, WY (there are additional requirements for those states marked with an asterisk). Prosper does not allow any additional states on their trading platform.

Join Prosper

Interest Rates Comparison

The interest rates charged to borrowers changes regularly, but as of this writing Lending Club interest rates range from 6.03% up to 24.11%. It is a somewhat complex formula that takes into account various factors that appear on a borrower’s credit report such as FICO score, number of recent credit inquiries, length of credit history, total number of open credit accounts and revolving credit to name a few. Most borrowers will also end up paying a higher interest rate the higher the loan amount and for 60 month loan terms versus 36 months.

Prosper has slightly higher rates and also allows borrowers with lower credit scores on to their platform. Their interest rates range from a low 5.65% up to 31.99%. Prosper offers 12-month loan terms which carry the lowest rates and they also allow borrowers with a slightly lower credit score than Lending Club and these people typically pay the highest rates. There is no public information as to how Prosper calculates their interest rates but we do know that they take into account credit data such as number of inquiries, available credit, credit card utilization and recent delinquencies.

The Investment Platform

Prosper and Lending Club both allow investors to invest in a minimum of $25 per note but Prosper does give a little more flexibility here. With Lending Club you must invest in multiples of $25 whereas Prosper allows any amount of at least $25. The minimum needed to open an account is just $25 with either company.

Semi-Automated Investing

Both companies will help take the legwork out of investing for you. At any one time there are hundreds of loans available for investors on either platform. But investors wanting just a broad cross section of loans can invest their available cash in just a few clicks.

Lending Club always provides three options when you invest in this semi-automated way: High, Medium and Low risk loans. Enter the amount you want to invest (or just let them invest your available cash) and just a couple of clicks later you are done.

Prosper has a Quick Invest feature that allows investors to put new money to work very quickly. With Quick Invest you can choose the loan grade or other filtering criteria and you can invest any amount greater than $25 in just four clicks.

For those investors who like p2p lending but don’t want to manage their investments at all there are “managed account” options at both companies. Lending Club PRIME has a minimum investment of $5,000 and is subject to a one-time 0.8% fee. PRIME accounts are fully hands-off – the investor provides some initial direction (as in what interest rates to invest in) and then the Lending Club takes care of the rest. Prosper has something similar called their “concierge service” that starts at $25,000, but has no fee attached to it.

Manual Investing

If you like looking at individual loans then both companies allow fully manual investing. You can filter the loans on the platform according to interest rate, loan term, loan purpose as well as a whole range of date pulled from borrower’s credit reports.

Lending Club allows the added benefit of being able to download the spreadsheet of all available loans on the platform, and then you can do analysis on these loans in Excel. Prosper doesn’t allow a download, but it does have superior filtering capability on their platform. One little trick for Prosper investors: if you use Google Chrome you can get a plugin called Prosperity that will display the credit data for each loan on the page (as long as you are logged in to your Prosper account). I use this feature all the time, and have found it to be very helpful.

Credit Worthy Borrowers and Default Rates

Both companies have strict underwriting standards and a borrower must have decent credit before obtaining a loan from either company. Lending Club uses Transunion to pull credit data and they allow borrowers with a minimum credit score of 660. Prosper uses the Experian Scorex credit score and allows borrowers with a minimum credit score of 640 (this minimum score is reduced to 600 for borrowers taking out a second loan).

Defaults are a big concern for every p2p investor. When comparing the defaults from all loans that originated in 2010, we can see that Lending Club has a slightly lower default rate (as of this writing) of 3.2% versus at Prosper 5.7% (data from Lendstats.com). This doesn’t mean that returns are lower at Prosper than Lending Club; it just means that Prosper has on average higher risk (and higher return) loans. This is demonstrated by the average interest rate for 2010 loans. It was 12.2% at Lending Club versus 19.2% at Prosper.

Which Company is Right For You?

I am not going to make a recommendation between Lending Club or Prosper. I know Investor Junkie is a Lending Club investor, but I have accounts at both companies, and I continue to add new money to my investments there. I encourage every investor to check out each company, take a look at their platforms and get a feel for which one you prefer. New investors should also take a look at the prospectuses of both Lending Club and Prosper, you should always know the risks involved. Also the entire loan history for both companies is available for download online.

My opinion is that new investors have two great choices. If you can’t decide between the two companies then do what I did – open up accounts at both companies.

This was a guest post by Peter Renton, editor of the Social Lending Network a blog dedicated to the peer to peer lending industry.

Buying Gold Online

Larry Ludwig — Wed, 31 Aug 2011 00:52:46 +0000

Gold has been on a multiyear bull run. Investors that purchased the metal have benefitted as the price has rapidly gone over $1,900 an ounce. There are a lot of people that believe that the run up in gold is just beginning. They feel that the precious metal is still in the mid stages of its climb upward. There are several reasons to believe this with inflation being one of the biggest catalysts for an increase. If you are one of the investors that are looking for a way to buy some gold, you can find it online. Here are a few ways that you can buy gold online.

Buying Gold Online

You can buy gold in many different forms but the easiest way is to buy the physical asset in the form of gold coins. Sites like APMEX have an incredible selection of gold coins for you to select from. APMEX stands for the American Precious Metals Exchange. They are one of the largest gold dealers in the United States and offer great deals on all types of gold. The company is an authority in the precious metals market and has received world wide acclaim.

Gold Coins

If you want to go the gold coin route, you can buy American Gold Eagles. They are available in sets and can be bought in quantities from 1 to 100. Gold Eagle coins are really easy to file away and store. They are affordable as well since you can buy one at a time. You can always add to your collection whenever you like and they are easy to sell. Coin enthusiasts and gold buffs are always in the market for gold coins and would be willing to buy them from you when it is time to sell.

Gold Eagles are not your only option when it comes to coins. You can also purchase Canadian Gold Maple Leafs, Gold Buffalo Coins, Mexican Pesos, Australian Gold, and even European Gold Coins. APMEX has a large variety that will meet the needs of any gold investor.

Gold Bars

The purest form to buy gold in is as a gold bar. You can buy ounces of gold and store them just like your very own Fort Knox. Gold bars are sold in ounces and grams. They are fairly lightweight and can be stored at your local bank or in a safe. These bars typically move in conjunction with the spot price of gold. Gold bars are stamped with the quality and fineness of the bar. Each bar has its own serial number as well. Credit Suisse & Pamp Suisse are two of the most recognized companies in the gold market today. You can rest easy with either of these company’s bars in your safe.

There are quite a few ways for gold hungry investors to purchase physical gold for their portfolios. They can buy gold coins or gold bars depending upon their preference. They can hold these assets while the price accumulates and sell them when the time is right.

REIT (Real Estate Investment Trust) Investing

Larry Ludwig — Mon, 22 Aug 2011 13:06:03 +0000

REITs or Real Estate Investment Trusts investments are an alternative to purchasing real estate directly. It’s owning real estate without the hassle. A REIT is similar to owning a stock, where it can be publicly traded on the stock market. There are also REITs mutual funds, and ETFs that diversify by investing in many individual REITs.

By tax law, REITs have to return 90% of their income to their shareholders. By this setup many REITs have attractive yields. On average a REIT yields around 5 – 6%. Unlike dividend stocks which are currently taxed at maximum of 15%, REITs are taxed at your ordinary income rate. So in many cases you are best to invest in REITs in tax differed accounts like an IRA or 401(k) to minimize taxes.

Just like real estate, REITs can invest in many categories, and/or many geographical regions. Real estate is typically broken down into these categories:

Industrial and Office
Retail
Residental
Lodging and Resorts
Health Care
Self Storage
Speciality

Wikipedia has a partial list of the US based publicly traded REITs.

REIT Advantages

Low Amount Needed To Invest – You don’t need a lot of money to start investing in a REIT. Owning a REIT index fund gives you exposure to the real estate asset class with very little money.
Passive Investment – Directly owning a property is a business, and is not true passive investment like a REIT investment
Low Correlation – REITs historically have a low correlation to other asset classes. When a stocks zig, REITs typically zag.
Liquidity – Unlike owning a property directly, investing in a REIT can be a quick enter and quick exit if you’ve made a mistake. Traditional real estate has a long enter, and exit process so you investment isn’t liquid.

REIT Disadvantages

No Tax advantages – Unlike owning a property you do not have tax advantages, such as depreciation.
Limited Tax To Differed Accounts – Dividend income is taxed at ordinary income. While you can put a REIT into a taxable account, your dividend is significantly reduced.
Less Control – Unlike owning a property yourself, you have less control over the management and profit.
Dividends Not 100% Guaranteed – Dividends can decrease and not 100% guaranteed like we saw during the 2008-09 downturn. So in this respect it is not like owning a bond.

REIT Investing

In most cases you are best to gain REIT exposure via an index based mutual fund or ETF. When a REIT fund is indexed it is based upon MSCI REIT index. Which has a weighting in these categories:

REIT Type	Percentage
Diversified	8.80%
Industrial	5.80%
Office	17.10%
Residential	15.10%
Retail	25.00%
Specialized	28.20%

So if you have other real estate investments (which can include primary residence) make sure you don’t have too much invested in residential real estate. An argument against using an index based REIT is too much allocation in one specific sector. If that is your concern you can add specific REITs to your portfolio.

REIT Index Funds

They are many to chose from:

iShares Cohen & Steers Realty Majors (ICF)
Vanguard REIT Index ETF (VNQ)
Vanguard REIT Index Fund (VGSIX)

Summary

REITs are a great alternative to owning real estate directly. While they do have some disadvantages to owning real estate directly, they are an easy way to gain exposure to real estate with very little money.

Is Gold Really Money?

Larry Ludwig — Tue, 19 Jul 2011 12:30:25 +0000

Texan Senator Ron Paul asked this very question to the head of the Federal Reserve chairman Ben Bernanke last week. Ben stated flat out “no”. Gold (and silver for that matter) for thousands of years was excepted as a form of money. Only until the last 100 years have we’ve weaned ourselves off of the standard. If gold isn’t money, then what is it today?

It’s interesting to note if your employer offered you gold instead of dollars would you accept it? In my case I certainly would. The straw man argument against gold and silver is you can’t eat gold. You can’t eat dollar bills either, but they can be used for toilet paper. Like all forms of money it’s a means to store value, and eventually used to consume a product or service.

Check out this 1947 film from the US government that mentions what are the good characteristics for something to be money. If gold and silver were a good form of money then, why is it not now?

The fact of the matter if gold isn’t a form of money why do central banks hold it? Money is whatever people as a whole accept as tender. Therefore gold and silver are a form of money if others accept it as tender. Before gold and silver were determined to be a good medium of exchange, people used wigwams or rocks. The problem was with other forms of money it was easy to replicate and make counterfeit.

Our money is faith based and debt based. If people lose faith in the US government, it’s possible people won’t trust US money as a valid currency.

Lending Club (July 2011 Update)

Larry Ludwig — Wed, 06 Jul 2011 02:13:40 +0000

This update marks now two years since I’ve been investing in Lending Club notes (see my first review of Lending Club). Since my last update, my NAR has decreased to 11.32% from 11.35%. Since then I’ve had an additional note default. I now have exactly 300 notes in my portfolio and is up from 222 notes. I now have over $6,000 invested with Lending Club.

I started monitoring my progress in December 2009 via this blog. I’ve decided for this post to show a graph history of my performance. As you can see my performance hasn’t varied too much over the years. This shows when investing in Lending Club returns can be steady, but obviously not the same as a fixed rate CD. For performance before January 2010, assume my performance was similar. Though I didn’t have that many notes invested.

In the past year, I’ve seen three defaults. This explains the initial decrease, and then a slight decline over time. I’ve tried to keep up with investing in risker loans that Lending Club does not price properly. The butter zone for Lending Club notes that I like seem to be around 11 – 13%. So far my investing strategy has worked out well. Based upon other investors, what I’m seeing is to be expected. The peak time to default is around mid-point of a 36 month loan. We’ll have a better perspective next July of my Lending Club performance. That will then be a full 3 years into using Lending Club, and my initial notes will start maturing.

Is Lending Club No Longer a Good Investment?

Larry Ludwig — Mon, 25 Apr 2011 03:20:37 +0000

There seems to be a great debate going on the web regarding investing in Lending Club. As an investor of Lending Club notes, you have a chance to ask questions to the borrower.

Asking questions is somewhat unique in the investment world. You normally don’t get to ask direct questions to the board, or on the quarterly conference call before buying a stock like Apple (APPL). The issue was the questions on Lending Club were open ended. As of last week, Lending Club changed their question and answer section to only allow a set of predetermined questions. Keep in mind the Q&A section was not removed altogether.

The official reason was because of privacy concerns. Investors were asking too many probing questions, and the borrowers gave away too many details possibly revealing who they were. From their blog:

Starting tomorrow, investors will only be able to ask questions from a predefined set that was created based on the most frequently asked questions logs over the last 2 years and reviewed and edited by our compliance team. As an investor, feel free to submit additional questions that you would like to see added to list to feedback@lendingclub.com.

As always, your comments are welcome as we continue to make improvements to our platform.

When I saw the change last week, I didn’t think much of it. In the almost two years of investing with Lending Club (see my initial review of Lending Club) notes, I never asked a borrower a single question. I felt most already asked the proper questions, or based upon quantitative information didn’t think the note was a good investment. When I did look at the questions and answers section, I would use it to help tip me in one direction or another. For the most part I would quickly scan this section. Most of my time is spent filtering out unwanted notes because Lending Club’s search filter is too limited.

Based upon Matt’s post on Steadfast Finances, and the Social Lending comments, it seems many fellow Lending Club investors have reacted negatively to the change.

It’s A Big Stink About Nothing

I personally prefer quantitative and fundamental analysis of my investments, than get my emotions involved. If I do get my emotions involved, it because the analysis is mixed. Which also means it’s a risker investment. In addition, with the amount of loans you should be investing (over 200), how much time is required to do this work? It’s not scalable, or at least the time to return ratio is low. If you spend this time, will your net return be any higher? As I mention in a previous post (Does Passive Income Really Exist?) every investment requires an amount of initial, and reoccurring time. You should maximize your return, while minimize your time. Asking questions for each investment is a very time consuming, and I don’t believe you will see a positive return from the effort.

Keep in mind a good portion of Lending Club investors use automated methods to invest. They never even see the Q&A section. I’m not suggesting Lending Club investors should go down this path. I will continue to use my agressive filters, and manual review every note. I do believe this yields a higher return, and so far my returns have proved this.

From the two defaulted notes I have so far, both completely passed the “sniff test” if you looked at their Q&A section. One of them in fact only made two payments before defaulting, and more than likely was a scammer. I understand two examples does not make a statistical trend.

My point is someone can be very good liar, and a Lending Club investor would never catch this in the question and answer process. One of the comments from Matt at Steadfast Finances was how do you know they aren’t lying about their income? Since last year, almost all of my loans are to Lending Club borrowers who’s income has been verified. Since these loans are unsecured I make sure every borrower has over 10 years of credit history, never defaulted, and never late on a payment. These in my opinion are better quantitative indicators a borrower will not default. After all, that’s the only net result we care about right?

I not criticizing the investors who no longer invest with Lending Club. That’s fine with me, there are other traditional and alternative investments available. They are free to determine what’s the best place to put their money for investing.

Sure I have some Lending Club complaints. Peer to peer lending is not perfect, and does have areas that need improvement. Not only do I think Lending Club should be verifying income for almost all loans, but require an initial comment from the borrower for the loan purpose.

My position is this change with comments shouldn’t affect performance. Most investments with a marketplace (ie NASDAQ, NYSE, etc.) you do not ask direct questions before making an investment. You should be getting transparency, and Lending Club provides quite a bit of quantitative detail about each investment. It is possible Lending Club could make some improvements in the transparency. Though there are very valid concerns to what degree without revealing the identity of the borrower. I myself will continue to invest with Lending Club, and my positive opinion about Lending Club hasn’t changed.

Get Started as a Lending Club Investor

Buying Silver Online

Larry Ludwig — Sun, 10 Apr 2011 23:32:43 +0000

When someone speaks of investing in a precious asset, it’s gold that gets all of the attention. Gold prices are tracked by different indices, and prominently talked about in the news. Silver on the other hand is often overlooked by investors and does not receive the attention of Wall Street. Silver is known as the poor man’s gold. Despite these oversights, silver prices are at the highest levels that they have been at in over 30 years. The metal has been on a roll and is trading for more than $37.50 per ounce. There are several advantages to buying silver over gold right now, and APMEX is where I purchase my silver from online.

Why You Should Buy Silver

Silver is much cheaper than gold but yet moves in conjunction with gold prices. Over the years, the gold/silver ratio has been an important metric to follow. If gold rises, more than likely silver eventually moves with it. You can get a similar return to an investment in gold, and you can buy a much larger quantity. You can buy nearly 40 ounces of silver for the price of one ounce of gold. This makes it easier to buy a lot more silver since it sells at such a low price. Silver, unlike gold, has many more industrial uses. So as the economy picks up, typically silver increases in price.

Silver is easy to dispose of. You can easily sell silver either at a physical coin collection shop or online. The price makes it cheap enough that both large and small collectors can acquire the precious asset.

Silver Coins

Silver is incredibly easy to buy from places like the American Precious Metals Exchange (APMEX) and have bought most of my silver from them. As I’ve mentioned in a previous post, I’ve bought from APMEX gold and silver. APMEX is the one of the most popular precious metal dealers in the country. APMEX sells a large selection of silver coins in the form of American Silver Eagles, Canadian Silver Maple Leafs, Mexican, Chinese, and Austrian silver coins. Silver Morgan Dollars are one of these most attractive silver investments in the marketplace today. They are always advertised on television via commercials and infomercials. The prices that they are sold at on television are way too high. You can get them cheaper by buying them online.

All of these coins can be bought in mint and near mint condition. Silver investors can also purchase silver in the form of coins, rolls, and bags. They are available in 35%, 40%, and 90% silver purity. The cost of the silver is directly related to the level of purity of the silver.

Silver Bars

Silver bars are increasing in popularity. They are brand new and sold fresh from the United States Mint. The low cost of silver bars makes its easy for an investor to accumulate a large amount of them in a short amount of time. You could collect 3 one ounce silver bars for just over $100. The bars are easy to store and they are a nice hedge against inflation. Silver bars give investors access to the precious metals market at a discounted price.

Now you see why silver deserves a place in your investment portfolio. While other investors are chasing after the most popular precious metals, you can purchase a precious metal at a much lower price.

Lending Club (April 2011 Update)

Larry Ludwig — Fri, 01 Apr 2011 23:46:05 +0000

The second quarter of 2011 is here already, and it means another update of my Lending Club account. My last Lending Club update was January 2011. Performance since then has remained steady. My NAR (Net Annualized Return) is at around 11.30-11.45% . New readers to the blog should start reading my first post where I reviewed Lending Club. You should also subscribe to my blog because every quarter I update my performance.

For the past three months, my Lending Club account has pretty much been on auto pilot. I’ve met both goals I stated in my last post. I now have invested in over 200 notes.

You probably notice I now only have a little over $5140 invested, or around $120 more than my last post. Which is a respectable $40 per month in dividends. I did not add any new monies to my account this quarter, and only reinvested dividends. The Investor Junkie household had other retirement, and education accounts to fill up first. I was also paying off debt within my corporation so I took less of a salary. I do have a bank CD coming due this month, that was getting 5.40% APR (remember those “good” old days?). I do plan on investing part of the maturing CD into my Lending Club account, but the amount is undetermined.

Lending Club Defaults

I have another possible default, bringing my total up to three. While I’m not happy about this situation, it’s still be be expected with the grade of notes I am investing in. My performance is still much higher than the often touted 9.6% statistic Lending Club mentions. This is also higher than most other fixed income investments you can get at the moment in this low interest rate environment. To get anywhere near the same returns you would have to invest in junk corporate bonds, or very low grade munis.

The past week I’ve also seen three additional notes become late. I haven’t had the opportunity to review their accounts, but it appears all three notes are less than eight months old.

Lending Club Loan Size Increase

In the past three months Lending Club increased the maximum loan amount. Loan sizes have increased from the original $25,000 maximum, to now notes can be up to $35,000. As I mentioned in my steps to starting a business, Lending Club is becoming a more viable option for corporate borrowing. While $35,000 is not a huge loan, it’s large enough if your credit options are tight with other traditional options. Though as an investor, I do not invest in small business loans. Historically, small business loans are some of the riskiest notes you can invest in.

Get a $100 bonus for investing $2,500 (terms and conditions apply).
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Five Ways to Improve your P2P Investment

Guest Author — Thu, 27 Jan 2011 19:15:06 +0000

Peer to peer (p2p) lending has been around for several years now, but during this time there has been a wide range of investor returns. The most successful investors are earning more than 20%, but there are some unfortunate individuals who have lost money with returns of -25% or worse. Most investor returns fall somewhere in the 6-12% range. So how can you ensure as an investor that you earn an above average return? Here are five keys that will help you become a successful p2p investor.

Diversification

This is the most important point of all. You can really limit your chances of a good return if you do not diversify. If you invest $5,000 or less then you should consider keeping each loan to just $25 (the minimum). You will have defaults during the life of your loans and you want to limit the damage that defaults can do to your returns. Don’t make the rookie peer to peer lending mistake I made, and split your initial investment between a small number of loans. If you only invest in a handful of loans and one of those loans defaults then you have ruined any chance you had of a good return. Both Lending Club and Prosper have automated plans that allow you to easily diversify your investments among many loans. But serious investors will consider each loan individually, which brings us to the next point.

Choose Your Loans Carefully

You can use the automated investing plans, provided if you want to receive an average return. Don’t take it the wrong way. An average return with p2p lending continues to be an excellent investment in today’s low interest rate climate, but if you want a great return you need to be better than average. This means you need to look at the loans individually. This can be a little daunting with hundreds of loans to choose from so I recommend you narrow down your loan selection first by using some p2p lending filters. Once you have narrowed down your selections then you can read the details of each loan to find out more about the individual borrower. You can even ask the borrower some questions before making your decision.

Invest Slowly

With most investments you just transfer your money in and it starts working for you right away. With p2p lending it is best to invest slowly. If you have followed point two here then you likely only have a small number of loans that seem worthwhile. Depending on your investment amount, invest a small amount (I recommend $25 or a maximum of 1% of your loan portfolio) in each loan and then wait a few days until more loans are available. Then repeat the process. It might take you several weeks until you have all your money invested but in the end you will have a high performing loan portfolio.

Select Longer Term Loans

This is not something that Investor Junkie does, but longer term loans provide you with a 2-3% bump in interest rates. My research has shown that the majority of defaults occur early in the life cycle of a loan so I would expect defaults to be only slightly more than with the three year loans. Even if they are a little more you have some more wiggle room with the higher interest rate. Having said that, these five year loans are still new, they were introduced just last year by both Lending Club and Prosper, so there is no guarantee that these longer term loans will perform better in the long run. The way I see it, if you choose your loans carefully, thereby limiting your number of likely defaults, the extra 2-3% is worth the extra risk of the longer loan duration.

Reinvest Interest Payments

Once you have invested in loans you will start receiving payments in your account within 30-45 days. This cash will sit in your account earning 0% interest until you reinvest in new loans. As soon as your balance goes over $25, you can invest your cash into a new loan. Depending on your account balance this can happen quickly. With a diversified $10,000 loan portfolio you typically get enough cash to invest in two or three new loans every week. Keep in mind with p2p lending you are getting interest plus principal payments for each loan every month.

In Summary

One final point that will help you become a better investor. Don’t rely on the ROI numbers that Lending Club or Prosper provide. Do your own analysis to determine your real p2p lending ROI. Both companies tend to overstate your actual return a little and so it is best to find the real number yourself using a simple Excel spreadsheet and the XIRR() function.

Many investors are drawn to p2p lending because of the promise of high returns but few investors take the extra time to discover how they can maximize these returns. If you implement these five keys it is highly likely that you will become a successful p2p investor with above average returns.

This was a guest post by Peter Renton, editor of the Social Lending Network, a blog dedicated to the peer to peer lending industry.

Lending Club (January 2011 Update)

Larry Ludwig — Wed, 05 Jan 2011 14:17:49 +0000

The new year is here, and once again it’s time to update my performance since the original Lending Club review. Drum roll please… 11.42% NAR. So far performance is doing great, and I will restate that I am happy with my returns. Last quarter you’ll notice my performance was at 12.38%. This 96 basis point decrease is attributed to one note that defaulted. I’ve continued to add newer loans that have more strict requirements. I now do not accept any borrowers with a history of late paying or defaulting ever.

Details

Performance: My performance is in the 57% percentile when compared to others who have invested $5k – $10k. Not bad based upon the length of doing this, but not outstanding either.
Defaults: One default with another one possible this quarter. I’m not sure of the exact reason for the default, but the person made only two payments, stopped paying, and their credit score went off the deep end. It is possible they were a scammer, but not too sure from the Lending Club details. Though the peak of defaults is expected based upon the length of time investing in Lending Club. The peak is around 18 month timeframe and I’m almost there.
Amount Invested: You’ll also notice I now have over $5,000 invested. I added $2,000 in the beginning of October 2010. It took almost 6 weeks to completely allocate that new capital.
Portfolio Composition: Most of my portfolio is broken down into ‘B’, ‘C’ and ‘D’ rated notes.

Observations and Comments

My Lending Club filters are very strict, and it takes me awhile to find a note that I like. Keep in mind; I also only invest in 36-month loans. Lending Club and its borrowers seem to focus more on 60-month notes more. You can find double the amount of the longer-term loans. While some might want to invest in these notes, I have still kept to my guns, and only do 3-year loans. Sure I could take on the longer term loans but they only take on average 2% higher return than their 36-month counterpart.
Unless you pick randomly, let Lending Club do the selection, have low lending standards, or lower your return rate; you won’t be able to invest large sums of money. At least for me, it seems I need to add additional amounts in small chucks, and not all at once. It took over 6 weeks to allocate $2,000 I added. Keep in mind, I also reinvest all money that’s paid back to me.
I have very few ‘A’ rated notes. I’ve deemed them actually riskier for the rate of return than the lower grade notes. I would rather take risk on a higher NAR loan with what Lending Club deems riskier and has a higher rate of default. If you look at the statistics this is what they show.
Blogger Steadfast Finances has a great tip that you should check out to review lending club notes faster.

1st Quarter 2011 Lending Club Goals

Reinvest any fully paid loans and any money returned from paid loans. I will keep doing this until I get to three-years investing with Lending Club.
Have over 200 issued and current loans

I do not plan on investing any new monies until the second quarter of 2011. I have other investments, debts, and commitments that I want to take care of first.

Get a $100 bonus for investing $2,500 (terms and conditions apply).
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The “Investment” Often Missed.

Larry Ludwig — Tue, 16 Nov 2010 16:12:43 +0000

The constant theme for the past year or so with my blog, and with my personal finance is returns on fixed rate investments stink. The head of the NY Federal Reserve even stated this morning on CNBC, one of the purposes of quantitative easing is to force people to invest in more riskier assets. No surprise there but just makes it official. As I’ve mentioned recently a few times, pre-paying your debt might is one option to “invest” in the current economic environment. Pre-paying your mortgage is a guaranteed return on your money invested, and compared to other safe returns it may make sense at this point in time. What’s the other “investment” many others haven’t considered?

Consume. Go out and buy products and goods. The Federal Reserve wants people to either consume or invest. With their monetary policy, they do not want consumers to save. I got this idea about “investing” after reading this Bogleheads thread. I’m not suggesting buy that big screen TV necessarily, though that’s more of a personal decision. With the heated debate between the WSJ and Sarah Palin about inflation, and all commodities have soared in the past year, maybe it makes sense to buying staples for the house. If you think we will experience inflation in the next year, you might want to buy food ahead of time. Unlike Glenn Beck, I’m not suggesting to stockpile food for fearing Armageddon. Buying food insurance is a crock, and a waste of money. I’m looking at it purely from what’s the best way to maximize the return of my dollar. Granted, buying food with the intent of consuming isn’t exactly investing, but can have positive returns none the less.

From my estimates, we approximately spent $11,000 on groceries in the past 12 months. That’s with 2 adults, one 4 year old, a 18 month old, a 3 month old baby, and a partridge in a pair tree. It’s not the biggest expense we have, but it’s in the top 5. Let’s say we get 5% inflation in food within the next 12 months. A quick back of the envelope calculation that means next year, if everything remained the same in our consumption, our food bill would be $11,550. If we bought some items in bulk ahead of time could we reduce that increase, or even decrease our bill from last year? It’s time to become a smarter shopper. Regardless of inflation or not with our ever growing children, our food expenses can only go up. If we see a great deal on something we constantly buy, we’ll stockpile it. Granted according to the Labor Department food is only up 0.6% YOY. At least from our anecdotal experience, we’ve seen slightly higher inflation.

Do you believe with the Federal Reserve’s QE2 we will experience inflation, or even worse stagflation. What can you do about it? Get yourself a membership to either one or all of the buy-n-bulk stores:

CostCo
BJ’s
Sam’s Club

Granted, like stock picking, you must know what’s a good deal, and what isn’t. Bulk purchases can be deceiving. That lifetime supply of Hellman’s Mayonnaise isn’t really going to save you money because it more than likely spoil before finishing. Not everything is cheaper in bulk either. In some cases we’ve found better deals at our local supermarket buying in smaller quantities. As of recent, even Tarzhay (otherwise known as Target (TGT) to English speaking folk) is trying to compete with the bulk stores. Target started offering a 5% REDcard off credit card for all purchases. I recommend getting that credit card and paying off the balance monthly.

Unfortunately in the NY area, Wal-Mart is a non starter. When going to college in the South my first experience with Wal-Mart store was a pleasant experience. Their stores were clean, well organized, and the people were friendly. The Wal-Mart stores in the NY area for some reason are awful, and avoid them like the plague.

Our visits to CostCo, and the local supermarkets we seem to stockpile up on:

Diapers
Baby food
Can goods (tuna, soup, etc.)
Grains (cereal, and pasta)
Condiments (mayo, ketchup, mustard, pickles, etc.)
Drinks (soda, juices, wine, and beer)
Paper goods (toilet paper, tissues, napkins, paper plates and paper towels)

For meat, we’ve thought about buying an extra freezer for the basement. We are still on the fence about this because of the additional costs for electric. I need to calculate this if it’s worth the expense.

Readers: Do you think this is a good idea? If so, what are you stockpiling?

Lending Club (October 2010 Update)

Larry Ludwig — Fri, 01 Oct 2010 20:22:23 +0000

As promised here is another quarterly update. If this is your first time reading about this, please read my original Lending Club review for more details on loan selection, and how I am investing. According to Lending Club’s stats, I’m up 40 basis points in my NAR (Net Asset Return) from my previous update in July. I’ve also almost doubled the interest received. Since then I’ve added only $50 in new money to invest. I’m doing pretty well with the notes I’ve invested in so far. Though I suspect one note will more than likely default this quarter. This should lower my NAR by 1-2%. I’ve decided I will not invest in any borrower who has ever defaulted, or been a late payer at anytime. Since these are unsecured notes I only have their honor they will pay the note back in full.

I’m noticing there are many more 5 year notes available than the 3 year notes. Based upon my filtering criteria, I’m barely seeing 10 notes available for me to invest. Unfortunately the 2% premium for 2 additional years in my opinion isn’t worth the additional risk. Based upon it’s an unsecured note, I would rather invest in other short term investments like dividend stocks. I have a CD in my CD ladder coming due this month, and I plan on taking some of the proceeds and adding an additional $2,000 to Lending Club. Based upon the amount of quality 3 year loans available, I may have no choice but to purchase some 5 year notes. I will still keep them to a minimum.

In the past few months I’ve noticed more press about Lending Club, and discussions as a serious investment product. Could it be that P2P lending will become mainstream? I think right now is a perfect time to invest in Lending Club loans because many bank rates on credit cards are much higher than the rates they offer. This means people are seriously paring down their deb,t and lowering their interest rates by using Lending Club. I suspect this trend will continue after all of the additional rules and regulation required for credit card providers become law this year. This means a niche Lending Club should be able to fill with lower lending rates.

4th Quarter Lending Club Goals

Invest another $2,000 to max out my goal of $5,000 investing in Lending Club for 2010
Reinvest any fully paid loans and any money returned from paid loans. Keep doing this until I get to three years into investing with Lending Club.
Review FOLIOfn for any notes I might be able to buy at a discount; increasing my returns
Add an additional 80 notes to my portfolio, getting close to the magical 200 notes within my account.

Get a $100 bonus for investing $2,500 (terms and conditions apply).
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Lending Club (July 2010 Update)

Larry Ludwig — Sat, 03 Jul 2010 17:15:07 +0000

Here’s the latest performance update for my Lending Club account. As of today I am earning 11.98% (almost 12% w00t!) annual return on my investment. This is up from my 11.27% return from my last blog post. I’ve been a Lending Club investor for over one year now. Since my last Lending Club update, I have added an additional $500.00 to invest. I had another loan pay off early this quarter. Also in the past week, I now have a loan that’s 16-30 days late. From my research, loan defaults peak around 18 months. So based upon my initial investments from last year I should see more of these. I’ve been adding notes slowly every month, reinvesting principal and interest into new notes. I’ve been buying mostly B, C and D notes (I have 30% of each). I’ve been very selective in my note picking, and still sticking with my initial Lending Club strategy.

5 Year Notes

Since my last update, Lending Club introduced 5 year notes. So far, I’m not impressed with them, and do not see the advantage as a investor. In my opinion, the average additional 2% interest (for at least the notes I invest in) for 2 more years is not worth it. You are taking on more risk, for an unsecured loan mind you, and not getting that much return. As a borrower, I think 5 year loans are a much better deal. What’s not to like as a borrower? You get a lower rate over a longer period. So as an investor I’ve been sticking to only 36 month notes.

One Late Note

The current late note it’s the borrower’s first payment Lending Club. This of course isn’t a good sign. They previously never had any delinquencies, nor any public records on file, and have a credit history going back to 1994. The other ironic thing is their FICO credit rating went up the past month from 679-713 to 714-749. I have put the loan on the block through Lending Club’s FOLIOfn. So far I do not have any takers and may reduce the sale amount. The takeaway from this is you never know who’ll become a late payer or default.

Some highlights in my investing for the past three months:

I now have 89 notes total. Another one paid early. No defaults and one late payment.
I added an additional $500 and plan on investing in more notes

Update: As of July 6th 2010, I’ve now reached 12.00% return with my Lending Club investment.

Get a $100 bonus for investing $2,500 (terms and conditions apply).
Sign up as a Lending Club Investor!

Lending Club (March 2010 Update)

Larry Ludwig — Mon, 22 Mar 2010 01:11:05 +0000

When I initially posted my Lending Club review last December I promised I would give periodic updates. That time has come. I’ll let my screenshot speak for my results:

As you can see my performance has increased from 10.45% to now an annual return of 11.27%. Some highlights in my investing for the past three months:

I sold one note on FOLIOfn because their credit score lowered significantly and was concerned they were going to either become a late payer or default.
I now have 38 notes total. One paid in full early. No defaults or late payments.
I just added an additional $1k this month and plan on investing in more notes

Come June, I’ll be investing in Lending Club for one year. So far I’ve had great results and been happy with experience.

Ginnie Mae Investing

Larry Ludwig — Fri, 05 Mar 2010 16:32:02 +0000

CD rates and money market accounts currently offer dismal returns. What is an investor to do get higher returns, yet not drastically increase risk? As I mentioned in my 4% Rule to Investing, Ginnie Maes are a good possible alternative. Who is Ginnie and does she have anything to do with Fannie and Freddie? Ginnie Mae, otherwise known as the Government National Mortgage Association, is a U.S. government-owned corporation within the Department of Housing and Urban Development (HUD). Ginnie Mae provides guarantees on mortgage-backed securities (MBS) backed by federally insured or guaranteed loans, mainly loans issued by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing. Ginnie Mae securities are the only MBS that are guaranteed by the United States government. Ginnie Mae, which extracts fees for guaranteeing mortgage investors are repaid, is a smaller and more conservative player in the mortgage market than Fannie Mae and Freddie Mac were.

Now that you know what is Ginnie Mae, lets talk about these factors:

What kind of returns should you expect?
How volatile are they (what’s their beta)?
What risks do you have when investing?
How can you invest in them?

Returns

Vanguard's GMNA Fund returns of $10k for the past 10 years (click for a larger view)

Ginnie Mae returns are outstanding when compared to other government bonds. According to Morningstar, the Vanguard GMNA Fund has gotten an average 6.36% for the past ten years. The 1, 5, and 15 year returns also show similar returns, so it’s beta is very low. As the graph shows above, if you invested $10,000 in January 2000, you would have almost doubled your money. This is a perfect investment to add into your security bucket (fixed income) of assets. At the moment, I have portion of my security bucket into a Ginnie Mae mutual fund. Ginnie Mae are generating a much better return than other government bonds, CDs and money market accounts. So you are getting a premium return compared to treasuries, yet getting the same default risk as a treasury. What’s there not to like about Ginnie Mae bonds? In my opinion, the rate spread doesn’t warrant the implied increased risk, and are good bet to place in your portfolio.

Risks

As with all bonds, they can suffer interest rate risk, and should always be part of your investment equation. If the FED increases interest rates, the returns on Ginne Maes could decrease. They also can have (albeit very low) default risk from the government. The primary issue is when investing through mutual funds, because not all bond funds are alike. According to the Washington Post, some Ginne Mae funds invested in other bonds, and got burned during the 2008-2009 stock market crash. One fund lost over 5% in one year. Granted, a mutual fund named GNMA legally must invest at least 80% into Ginnie Maes, but it’s the remaining 20% that’s the killer. I always recommend using Morningstar to do your research. Find out what other securities the mutual fund invests in, and at what percentage.

Investing

The minimum investment for a Ginnie Mae bond is generally $25,000. You can visit Ginnie Mae’s web site for more information. Unless you are investing $200-300k to get proper diversification, I wouldn’t even consider that option. Most people are best suited to invest via a Ginnie Mae mutual fund. The reasons are: better diversification and don’t have to buy/sell the individual securities. In my opinion, the two best funds are from Vanguard and Fidelity:

Vanguard GNMA (VFIIX) – 0.23% expense ratio, $3000 minimum investment
Fidelity GMNA Fund (FGMNX) – 0.45% expense ratio, $2500 minimum investment

Both have a low expense ratio, consistent performance, and a low minimum deposit requirement. There are many other GMNA mutual funds available. Do your research on Morningstar for others. Currently there isn’t a Ginnie Mae ETF, and mainly because there isn’t an index to base the ETF upon. With active ETFs becoming more common, I suspect a Ginnie Mae ETF might be on the horizon.

Disclosure: I own shares of FGMNX.

What is a Master Limited Partnership (MLP)?

Larry Ludwig — Fri, 08 Jan 2010 21:30:41 +0000

What is a MLP? MLP in the investment world means Master Limited Partnership. MLPs have generated some of the best returns for the past decade, and yet it’s a secret to most investors. I myself only found out about them two years ago.

They are publicly traded, and you can purchase one on many of the security exchanges. MLP’s combine the tax benefits of a limited partnership, with the liquidity of a publicly traded security. It is known to some as a granny investment; they generate steady income, can appreciate like a stock, and have good tax benefits. I happen to love them since they are very similar, in tax advantages, to owning your own business.

Master Limited Partnerships are limited by US tax Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum, natural gas extraction and transportation. Some real estate enterprises may also qualify as MLPs. In addition, some private equity management companies such as the recently gone public, Blackstone Group (BX) and Fortress Investment Group (FIG) are structured as MLPs. Many MLPs generate 7 – 8% dividend yields, and most is tax-deferred. For many large master limited partnerships, 70% or more of their dividends are tax-deferred.

Advantages of a MLP?

MLP distributions are high and consistent. Average yield is in the 8% range.
MLPs have consistently increased their distributions over time.
MLPs have a low correlation to bonds and stocks, which makes it perfect in your asset allocation mix.
The corporate structure makes it a favorable tax treatment, and avoids double taxation.

MLP Taxation

MLPs have a big tax advantage compared to stocks with dividends and other assets classes. It’s a perfect investment to put into taxable accounts. While you can put a MLP in a IRA or other retirement account, it is not recommended because of the tax complexities.

With MLPs, you should practice a buy, and hold mentality because of the tax implications. When selling a long-held MLP the cost basis can be high because of the many years of dividends (they are really distributions).

With a MLP you do not get a standard 1099 form, and get a K-1 tax form instead. Unlike dividends, these distributions are not taxed when they are received; instead, they are considered reductions in the investment’s cost basis and create a tax liability that is deferred until the MLP is sold. Because of this deferral, unit holders often pay an effective tax rate of under 10% of annual distributions. Depending upon your tax situation, this rate can fall as low as zero in some cases.

MLP List

Here is a partial list of MLP stocks.

Boardwalk Pipline (BWP)
Enbridge Engergy (EEP)
Enterprise Product Partners LP (EPD)
Kinder Morgan Engergy (KMP)
Magellan Midstream (MMP)
Plains All American (PAA)

Summary

For anyone who’s looking for a a steady income and nice tax deferral, a MLP might be something you want to add to your taxable portfolio.

Disclosure: I own shares of PAA and MMP.

The 4% Rule to Investing

Should I Buy Gold?

Larry Ludwig — Tue, 15 Dec 2009 17:04:19 +0000

I had a friend of mine the other day ask me, “Is buying gold a good idea?” He then quickly proceeded to ask, “Should I add gold to my portfolio?” You might be wondering the same thing. I believe gold and other commodities should be part of any well diversified portfolio. If you have been reading any investment news lately, gold recently has hit an all time high, though recently slightly pulled back. I believe it’s wise to own gold, and should be part of your long term investing. I own gold coins, but also have gold based mutual funds and ETFs in our retirement accounts. I’m not a “gold bug”. Unlike Glenn Beck, I’m not believer that the world is going to hell in a hand basket, and you need the three Gs (guns, gold and god). It’s more related to macro economic trends – these trends started early 2000′s, continue today, and appear it will to continue for the distant future. With global monetary polices, it’s not a matter if we’ll have debasing of our currencies, it’s a matter of when and how much.

Why Own Gold?

Adding gold to your portfolio should not be thought as traditional investment compared to stocks. After all, when was the last time a piece of gold bullion gave you a dividend? Gold should be thought as an insurance policy. Do not look at purchasing gold as a method to get rich. It’s a method to help hedge against inflation, deflation, or uncertainty with government policies. With fiat currencies which are printing more money than ever, the repercussions could be dangerous. Right now we do not have the velocity with money, so therefore inflation is currently at bay. The Federal Reserve assumes they can remove the cash quick enough when our economy picks up. It can be said the Federal Reserve kept previous rates after 9/11 too low for too long, and where a primary member in causing the sub-prime crisis. The Federal Reserve also missed the crisis itself. What makes people think the Fed will be able to properly land this airplane?

Gold’s essential quality it’s not someone else’s liability or asset. That separates gold from the majority of capital assets rely on someone else’s ability to pay, like bonds and bank savings, or the performance of the management, or some other delimiting factor, as is the case with stocks.

The primary reasons to own gold:

As a hedge against inflation or deflation. It has been shown gold not only responds during inflationary times but holds up against a deflation.
As a hedge against a declining dollar. Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is the world’s reserve currency.
As a safe haven in times of geopolitical and financial market instability. It is often called the “crisis commodity”, because people flee to its relative safety when world tensions rise. Gold is not subject to decreasing value as more and more fiat money is printed.
Based on the commodity of gold’s supply and demand fundamentals. Gold is used not only used as bling-bling, but has commercial purposes. There are a limited amount of gold mines, and it’s costly to open new ones.
As a store of value. As mentioned initially, you don’t get rich owning gold. I keeps in line with the value of other market prices. Unlike stocks and bonds, it can never be worth zero.
To diversify your portfolio for proper asset allocation. Gold has had a negative correlation to stocks and bonds. There has been multi-year trends that gold out-performed stocks, will this trend continue?

Asset Allocation

How much gold should allocate to my investments? The typical allocation of commodities should be no more than 3 – 10% of your total portfolio. I recommend some physical holding of gold, and should be no more the 1-3% range. Plus, they are also nice to look at . With owning gold coins or gold bullion, you have to concerned where to store it safely and insuring it. You have a number of options: safety deposit box, hidden in the ground, in your own safe, or with a holding service. Gold is a small market comparative to other markets like the NYSE so pricing can vary quite a bit daily. For past few months we’ve seen wild swings of of up or down $25+ USD per day. I recommend with any commodity to dollar cost average, and buy on the dips.

Where to Buy Gold Coins?

You can buy online, or your nearest numismatic store. For online, I’ve had results when buying gold through APMEX, their prices are good and their service has been great. For a local store in Long Island, New York, I’ve had good results with Eastern Numismatics Inc. They are based on Long Island, but they also have a web site to purchase online. When purchasing coins they are typically 3-6% over the spot price of the raw material. This is because of the cost to create of the coin, transport and middleman fees.

Taxes

What happens when I sell bullion? Unfortunately the US government considers coins as a collectible, and is taxed at your income rate, not long term capital gains (like stocks). For this reason I plan on holding my coins for many years and maybe even pass down to my heirs.

Is there a gold bubble?

Maybe. It’s a little concerning when you can buy gold plated Sony PS3 game consoles, and every other commercial on financial news sites mention owning gold. For me, I’m a long term (10 – 20 year) investor, and based upon the macro economic policies gold will go higher. For the short term (next 6 – 24 months) it’s possible it will go lower. Silver is an alternative to gold, and might be a better option for the short term as the ratio to gold/silver is at historic highs. This means one of two things could happen, either gold is way over priced, or silver is under priced. I believe silver is under priced at the moment, with long term trend going much higher. Silver is used more than gold for commercial purposes. In the end, I believe it’s wise to own both commodities.

Disclosure: I own gold coins and gold (ETF and mining mutual funds) in our retirement accounts.

The 4% Rule to Investing

Larry Ludwig — Tue, 15 Dec 2009 00:42:38 +0000

As you probably already know, returns on fixed rate investments are pretty bleak. The Federal Reserve, since last year, has effectively set rates to zero. This made traditionally safe investments (CDs, government bonds, and money market accounts, etc.) limited with their returns. At the time of this writing, the only previously mentioned investments you can find higher than 4% is a 30-year treasury, and I’m not sure that’s a wise bet.

As of right now, Fed rates are expected to stay this low for a good portion of 2010. I’ll even go out on a limb and state these traditionally safe investments, with their current rate of returns, are not safe. Rates are artificially low, and can only go higher from here. In the long run, any of these investments run the risk of not keeping up with inflation. Inflation risk is a real issue, that’s rarely mentioned when investing. Inflation for the previous 30 years has averaged 3.28%, and it’s a good chance to be higher for the next 30 years. The Federal Reserve is punishing savers/investors, to help debtors, and that’s a topic for another discussion.

So what’s the 4% rule?

Rate Of Return (ROR) goal for ANY investment is greater than 4% annually.

I consider this as part of my security bucket of investments. These are investments that have a low beta, but yet generate monthly income. I have this rule because of the tax man, inflation and expenses quickly eat at your return and can make your return effectively zero. If expected returns are lower than this, in my opinion, you are best not investing in that asset. If you have a 5+ year investment horizon, you should get much more sizable returns on your investment. Any investment goal of less than 5 years should be only put into fixed rate investments, even if less than 4%. The goal is to prevent having to take the money out of the investment at an inopportune time. Money invested should be used for the ultimate goal to increase cash flow and should not be needed for any short term goal. My investment horizon is always 10 – 20 years and something I’ll discuss in future blog posts.

One of the basic rules of investing: The higher return, generally higher the risk. Depending upon the investment, there are things you can do to mitigate risk, but the general rule applies. For the past 100 years the return of US stocks has averaged 8%. With your investment, you may do better or worse, but is your top line goal. Annual investment returns above 8%, while possible, the odds become stacked against you. Getting somewhat safe returns of above 4% isn’t difficult, and should be the goal you shoot for.

Investments Options

The government is forcing investors, on purpose, to put their money into riskier assets. The question becomes, what other investment options are available that offer higher returns, yet are not as risky as say stocks? Since traditional fixed rate investments are earning nothing, what other alternative investments are available?

Peer-to-Peer loans. See my Lending Club Review
Ginnie Mae bonds
Master Limited Partnerships (MLP)
High interest savings
TIPS and I-Bonds
Corporate and junk bonds
Muni bonds
High dividend stocks (dividend aristocrats)
REIT Investing
Whole life insurance
Debts owed

Each can and will be a future blog post discussing each in detail. Like the song, “Which one of these is not like the others?” It’s the last one of course. Any debts you may have are not traditionally thought of as “investments”. Benjamin Graham mentions in “The Intelligent Investor”, like a scale, investments are always compared to other possible investments. Although debt owed is not discussed, I believe it should also count. For example, if you have a credit card rate that is 8% or greater you should pay off that debt first before adding additional investments to your portfolio. It’s a guaranteed rate of return that’s hard to beat. It becomes hard to find investments that can consistently beat 6-8% year after year. If you find something that will, go for it, but the odds are stacked against you. Home mortgages, because of their tax deduction, can have a higher APY (8-10%) before pre-paying. Bankrate.com has a great calculator for your mortgage interest rate after taxes and use that as a guide for the number to beat.

The questions you have to ask with any investment:

Can I get a better return somewhere else?
Does that investment have a similar or less volatility?

As the Federal rate increases so will the traditional investments in: CDs, government bonds, and money market accounts. Once their returns go above the 4% annual rate I will consider them attractive investments again. For now, I am placing money from my security bucket into alternative investments.

I will discuss each investment option in future blog posts.
Subscribe to my blog for updates.

Investor Junkie » Alternative Investments

Improving Your Lending Club Returns

P2P Lending Wealth System Course

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Lending Club (April 2012 Update)

Next Steps

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Trend Collectibles

What Makes Collectibles Valuable?

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Lending Club (January 2012 Update)

Lending Club Refer A Friend Promotion

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Alternative: Gold Jewelry

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Lending Club (October 2011 Update)

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Lending Club

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Buying Gold Online

Gold Coins

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Summary

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Is Gold Really Money?

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Is Lending Club No Longer a Good Investment?

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In Summary

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Details

Observations and Comments

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