diversification Archives - Lazy Man and Money

Lending Club’s Interesting Definition of Risk

March 4, 2009 by Lazy Man 4 Comments

I was using Lending Club to buy some notes the other day and noticed something very interesting. Take a look at the following images…

Did you see what I saw? Look at images A and B. You see that I can choose between a 9.74% interest rate at a 0.47/1 risk ratio or a 16.95% interest rate at a 0.79/1 risk ratio. (In truth there’s a whole spectrum of choices in between.) From these images, it seems clear that the higher the risk ratio, the more risk you are taking on. That’s all good until you look at the images in C and D. Note that the risk ratio is the same whether I’m investing in an A-rated loan or an E-rated loan. That risk is a high 1/1.

This leads to a very curious case when you compare images B and C. The B image seems to show less risk and a greater return. Why would anyone want to invest the way that image C shows?

I found this curious, so I asked Lending Club. It turns out that the answer is one of diversification. You’ll note that risk ratio in images A and B is the result of three loans. In images C and D there is only one loan. The lesson here is that Lending Club’s risk ratio is determined by a combination of loan risk itself and diversification. If you have enough money to put into loans at one time that risk ratio will be very low.

Lending Club admitted that this can be seen as a little interesting in the way I described it. They also said that they were looking into updating how the risk ratio works. I proposed that the risk ratio instead reflect the risk of the current set of loans on my whole Lending Club portfolio. I’m curious to see if they take my suggestion.

What do you think? How should Lending Club report risk? Let me know in the comments below.

Does Diversification Still Matter?

February 25, 2009 by Lazy Man 23 Comments

Taking a casual look at my investment performance over the last few months isn’t pretty. What’s that you say? Yours isn’t either? It seems like no one’s is. I was thinking about this the other day. Did I do everything right? I diversified. I have money in US stocks both big and small. I have money in foreign stocks. I have money in bonds (but only a little since I’m in my early 30s). I have money in REITs (again only a little). I even have a very small portion in peer-to-peer lending accounts like Lending Club. Looking back and everything only Lending Club made money. In fact it was the only thing that didn’t lose around 30%.

So if diversification didn’t help me, and I’m guessing it didn’t help you either, should we just conclude diversification is a myth? I’ve come close to believing this at times. Each time I do, I take a step back and look at things in historical context. In 2001 when tech stocks were crashing would diversification have helped? You betcha! The real estate market was booming. While other stocks weren’t performing greatly, you definitely didn’t want to be all tech stocks.

What about the Great Depression of the early 1930s? I’m not a historian of the time period and I’m not sure how much diversification there was then (how would an average person invest in all the companies in Europe back then?). Still it seems that like universally bad across the board. Perhaps the best move was just to put money in your mattress.

Here’s my conclusion: Diversification is like a seat belt. It’s going to help you in most accidents. However, if you are in a Smart car and get into an head on collision with a Badonkadonk at 120 miles per hour, that seat belt might not save you. It doesn’t mean you shouldn’t still have one on to protect you from the other more likely scenarios.

I Share My Asset Allocation (as do 7 other Money Writers)

September 23, 2011 by Lazy Man 6 Comments

The Money Writers is having a group writing project. Each of us have decided to share our asset allocation and performance from the first of the year to last Friday. You might want to put the children to sleep, this could get ugly.

Asset Allocation

I would like to say that I put together a great graph for you, but I didn’t. My only excuse is what you already know… I’m Lazy. Instead I’ve put together my portfolio holdings inside my retirement accounts. You may ask why I don’t have significant money invested outside of retirement accounts. Good question and I’m not sure I have the best answer. I believe in having a healthy emergency fund as well as maxing out my retirement accounts (401Ks and Roth IRAs). I’ve also bought some significant private stock in companies I used to work at. I can’t sell these shares and I can’t communicate them to you (they’d give away my anonymity to a number of people).

Below is my asset allocation. You’ll notice that one Roth 401k doesn’t make the tickers very readily available. I know I could look them up if I went to click through some PDFs, but it’s not really important to me. My goal with each account is to be fairly diversified. I know it’s not perfect diversification, but I plan to roll them over into a Zecco IRA when the economy rebounds. There I can invest in low cost ETF (as you’ll see in my Roth IRA where I have more trading ability). I don’t want to move it while the prices are low in the off chance that we get a recovery while I’m out of the market shifting the money.

I don’t know if anything in particular sticks out with this asset allocation. I suppose the shares of Google stand out, since it’s the only single company that I specifically went out of my way to own. I like to think of it as a hedge. Many websites, including this one, rely to some degree on Google sending traffic which leads directly to advertising dollars. If Google continues to monopolize Internet search, I want to stand to gain in the off-chance that they update their algorithm to hurt my sites. That said, you can tell I still don’t have a lot of money in Google.

The other thing that I find interesting is that I have just 20% of my money in international stocks. This is the first time that I’ve looked at it in totality and I’m disappointed in that allocation. I want to have much more money overseas. I don’t mean that to be anti-American.Â I think it’s simply arrogant to keep 80% of my money in one country. It’s not just any one country, but the one country that I depend on for my income. It feels like working at a company and investing in the company stock… one bad turn of events and you could be wiped out.

You are probably wondering two things at this point. The first: What’s the return on portfolio like this? I’m 7.22% in the hole YTD. I would like to say that I found a way to stay positive, but the market has just not been good. Long term, I still think diversified equities is a solid investment.

The other question you might be wondering at this point: How are the other Money Writers doing this year? I’m afraid to look, I’m sure they are doing better than me. Just so you have good laugh at my misery check out their asset allocations:

4 Investing Ideas for Your Economic Stimulus Tax Rebate Check

June 14, 2008 by Lazy Man 9 Comments

Today’s post comes from Miranda Marquit. She writes about personal finances for YieldingWealth and edits debt consolidation information for Destroy Debt.

The “economic stimulus” tax rebates have begun arriving, and now people are wondering how to spend them. Instead of blowing all that cash on something you don’t actually need, why not put part — or even all — of that money to work for you through investing? Here are 4 investing ideas for your “economic stimulus” tax rebate check:

Retirement account – If you aren’t putting the maximum amount into your retirement account, why not use that tax rebate check to bring it up to scratch? Even with a modest rate of return (around 7 percent) over 20 or so years, you can make a big difference in the end result if you put the money in your retirement account.
Index funds – In general, the stock market is struggling a bit. This means that now is an ideal time to get in (you know, the old “buy low, sell high”). You can buy more units for your money. And if you choose index funds, you can enjoy instant diversification. Over time, the stock market gains. You can take advantage of that buy getting in now, even though the returns are modest, averaging between 7 and 11 percent.
Cash – This is not going to get you a great return right now. But cash investments (like a high yield savings account or a CD) can be a good way to build your emergency fund. And they are safe, if you use a bank that is FDIC insured. You can pad your “rainy day” fund with an infusion in the form of your tax rebate check. The money will grow (albeit slowly), and offer you a bit of a safety net. Besides, the Fed has to start raising rates again sometime. When that happens your savings account yield will increase, and you can ladder CDs into something with a better return.
Growth stocks – If you’re the type of person who can stomach a little more risk, this might be a good opportunity for you invest in some growth stocks. These stocks are riskier, and you could end up losing the money, but it you choose carefully, you just might parlay your tax rebate check into some serious stimulus for your investment portfolio. One of the more promising sectors is clean tech.

What you choose to do depends on your risk tolerance and your investing style — as well as your individual needs. But no matter your decision, you can put this “found” money to work.