It's been a little while since I've done an update of my Lending Club progress. For those who haven't been regular readers earlier this year I looked at my Lending Club performance and was disappointed by the return of 4.78% - 84% of Lending Club investors did better than I did.
That performance was a hard on my ego. I had figured I could cut bait and give up on Lending Club or look into what I could do better. When I looked into why I was under-performing it was simply because I was investing in only the best credit risks - the ones with the least reward. When I looked at Lending Club's performance in general people who were targeting these great credit risks also had low returns. The people who risking their money had higher returns, even when accounting for the risk. So from that 4.78% in January of this year, I'm now at 7.13% on my whole portfolio:
I didn't add a lot of money in that time. In fact, I've only added about $450. The rest has been the result of reinvesting payments in my new strategy.
In my last update, a few people asked some very good questions about my Lending Club performance. The questions were a little too good... it would take me a few hours to answer them and I haven't been able to set that kind of time aside. Instead, I figured I'd try to give a little more input until my new strategy with the hope that at least answers some of the questions.
The biggest thing is that I have a saved search or saved filters. When I log into Lending Club, I click on Invest and open up the filters. Instantly, I'm presented with three options from least conservative to most risky. Since I'm often investing $25 or $50 at a time (accumulated payments from previous loans), these three options don't vary much for me. I usually pick the third (most risky) option and see that it gives me a projected return of around 12%. (It should be noted that Lending Club's projection and what you get aren't guaranteed, but so far the 12% on those loans seems to be the reason I've been able to push my earnings to over 7%. If I was starting fresh perhaps I'd be earning 10% or better without my previous strategy dragging down the percentages.)
The next obvious question is, "What are your filters?" Hey, I'm not Colonel Sanders, I'm giving away the secret herbs and spices. Here you go:
- Review Status = Approved - It's comforting to know that Lending Club looked over the loan and approved it.
- Credit Score => 714 - Even though I'll be taking loans with high returns, I want a good credit score.
- Interest Rate => 17.23% or Grade D - When I did my analysis back in January, grade D loans seemed to pay the best when adjusted for their risk
- Exclude loans invested in - I check this. Diversification 101.
- Months Since Last Delinquency = 24 - This is an area I should look explore switching to 60. My fear here is that I'd eliminate many loans. On the other hand, I do have the credit score filter which should factor in months since last delinquency.
- Delinquencies (Last 2 yrs) = 0 - In light of the above bullet point, feel free to call me Mr. Redundancy.
That's really all I have. The overall strategy is to get those loans high percentage loans while trying to weed out some as much of the riff-raff as I can.
At the beginning of the year, I viewed Lending Club as simply good diversification similar to adding bonds to your portfolio. Now, I could see it playing a little more significant role (though probably still less than 10%) and perhaps even out-pacing the equities portion of your portfolio more often that you might expect.
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