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Prosper Beats the S&P 500?

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prosper beats S&P 500"Prosper beats the S&P 500" - That's the subject heading from an e-mail that appeared in my in box last night. If that surprises you it probably should. It surprised me and I support the company more than most people. However, there's a graph and everything so it must be true, right?

I looked a little more into where the graph numbers come from. For some reason they decided to compare the average return of the S&P 500 over the last two years (from 8/16/05 to 8/16/07). It's worth noting that the S&P was at a 3-month low on 8/16/2007. They compare that against the returns of Prosper for one year. Why one year of Prosper vs. two years of S&P? I don't know. They could have just done one year of each, but my guess is that didn't look so well for Prosper.

So where does the 9.20% they advertise come from? One might naturally assume that all loans do. However, Prosper chose only a small subset of loans they offer - specifically the loans that beat the S&P 500 are those "originated between 7/22/06 and 7/22/07 to borrowers with AA credit grades who have 0 delinquencies and 0 to 2 credit inquiries on the their credit record, as of 8/23/07." They provide a handy link to the Prosper performance data over the last year. Looking at it, it seems like AA, A, and B loans all perform as advertised, but C, D, and especially E are far below the S&P 500. Grade E loans lose 8% on average.

While it seems that Prosper is doing a bit of cherry-picking here, perhaps we shouldn't fault them for it. After all, each lender can cherry-pick the people they lend money to on Prosper. If the average AA, A, or B loan earns over 9%, then if you can pick better than average loans you can do better. This is why I recommend that you review my keys to Prosper to Success. With no time investment at all, you can be getting several points above that average.

So while I think Prosper's marketing tactics can be a little deceptive, I think it has a place in one's portfolio. With people getting scared out of the US markets, a Prosper portfolio seems like a good hedge.

Last updated on July 29, 2011.

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12 Responses to “Prosper Beats the S&P 500?”

  1. rstlne says:

    Let’s take a longer timeframe then. The S&P 500 was up by 55.67% over the last 5 years. That’s 9.25% per year compounded. I think you can beat that in Prosper if you’re careful about the loans you choose.

    There are several reasons why you might not choose the Prosper route though:

    1. Tax treatment: Prosper income is taxed as regular income, which for many people is at a higher tax rate than the tax rates for capital gains and dividends.

    2. Market depth: There just aren’t enough good loans on Prosper if you intend to invest a large amount of money. I have a small amount of money in Prosper but even at that level, I’ve had trouble finding enough good loans in which to invest.

  2. Lazy Man says:

    I agree with the tax treatment. It’s not as favorable. However, I still think it’s helpful as normal diversification.

    I disagree with the market depth… The link I provided will show that the average for all AA, A, and B’s are over 9% for the last year. If you look at the performance data, there’s nearly 30 million dollars lent out at those averages. If you want to be picky and try to beat the averages significantly, I think you create your own market depth issue.

    Someone could easily put down a million dollars and set it to invest a couple of thousand in each AA, A, and B loan. Of course if you are investing multiple millions of dollars it might not work, but that’s really not a big problem for most people.

    I have been investing around $400-$500 a month, much more than the average income earning person should be applying to Prosper, and have not had problems finding loans. I look at only a very, very small subset of loans, probably only 3% or less of all Prosper loans.

  3. Mike says:

    Lazy Man,

    I wrote up a post that compares the S&P 500 versus Prosper loans for the same time period and also included the tax treatment. It wasn’t so good for Prosper.

    Taking their numbers on face value however, the tax treatment equalizes things, and I’d expect a premium for the decreased liquidity that Prosper offers (they’re unsellable – you have to wait for the loans to amortize out).

  4. Foobarista says:

    A good vehicle for Prosper investing would be a self-directed IRA. Then, the tax issues nicely go away, especially if it’s a Roth IRA.

  5. Brip Blap says:

    One of these days I’m going to start looking into Prosper, but it still just makes me too nervous. I know that the market has a fair amount of risk, too, but something about Prosper is too risky to me. And that is the problem – for the risk I feel Prosper inherently has, it seems to me that it should have much higher returns. If you’re getting these tricked-out stats it is not at all comforting.

  6. Lazy Man says:

    Well, they are choosing to trick-out the stats to make them seem better, but it’s my opinion that they aren’t that bad to begin with. See the link of market data and you’ll see that they could have just said something like, for all loans greater than B and left out the “0 delinquencies and 0 to 2 credit inquiries.” It’s like they are shooting themselves in the foot making it seem more suspicious than it needs to be.

  7. Jonathan says:

    I don’t know about a hedge, if the economy slows, the payback rates on Prosper are only going to be worse. I think Prosper returns should be compared more to junk bonds.

    I’ve been trying to grab some 9% rates on AA/A loans, but they keep getting bid down to 7-8%. That’s not enough risk premium for me.

    Prosper should look into packaging loans to give instant diversification for those without the money to fund several different loans.

  8. Lazy Man says:

    @Jonathan: That’s really weird. I’ve generally been able to get my fill of 14+% AA/A loans. I think the key is to go with the auto-funding ones. No bidding down is a good thing. At those rates, there’s plenty of risk premium for me.

  9. Foobarista says:

    LM, it would be nice if you fixed your “spam word” catcher to not flush the post if you forget to type the antispam word.

    Anyway, someone sent me an email about how to use IRA funds in something like Prosper. To do this, you have to open an IRA with a self-directed “IRA custodian” that lets you get at the money after letting them “touch” it. You open the account at Prosper in the name of the IRA account – it’s a legal investment entity that can own stuff – send your money to the custodian, and then they send you a check or wire your money to Prosper. After this, any Prosper gains are in your IRA’s Prosper account and subject to IRA tax rules.

    Since there are fees involved, this sort of IRA is best for rollover IRAs and/or those with a fair amount of money in them. The ongoing funding of an IRA is probably best done with a more traditional broker custodian since they don’t have fees to deposit money. But since you can have as many IRAs as you like, you could use a special IRA for Prosper funding if you like, while having a “main” IRA at a brokerage where you do regular deposits and that is used for stocks or mutual funds.

    An example of a self-directed IRA custodian is IRA Services. We have one of these IRAs that we use to invest in some “private” investments. These can also be used to invest in real-estate or other investments through an IRA.

  10. Mike says:

    Brip Blap,

    By all stats I’ve found, high quality borrowers have much less volatility than the stock market, which makes it intriguing. How it the default rates handle the sub-prime troubles will be the real test, however.

    Foobarista,

    Prosper requires you to register the account in your name and your SSN as your tax id. They don’t allow anything else right now (though I do like how you think).

  11. […] and Lazy Man and Money pointed out that Prosper is occasionally posting misleading information (lazy man money link), so the data listed above, which is not rosy, may be whitewashed. Prosper also stated in a […]

  12. ssn search says:

    Lazy Man,

    I wrote up a post that compares the S&P 500 versus Prosper loans for the same time period and also included the tax treatment. It wasn’t so good for Prosper.

    Taking their numbers on face value however, the tax treatment equalizes things, and I’d expect a premium for the decreased liquidity that Prosper offers (they’re unsellable – you have to wait for the loans to amortize out).

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