Lazy Man and Money

Does Diversification Still Matter?

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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.

Uncrunch America with Change.org

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While most blogs are probably planning their New Year’s Resolutions, I’m taking action. I just voted to support Uncrunch America campaign in Change.org’s Solving the Credit Crisis From the Bottom Up. That’s quite a mouthful (or is it ten-fingersful since I’m typing?). Allow me to explain a bit.

Obtaining credit is getting more and more difficult in this country. For so long, it was really easy to get credit – too easy. We found that out all too well with the sub-prime mess. In an attempt to right the wrongs, lenders have over-corrected… they are requiring pristine credit scores to lend. “Once bitten, twice shy” isn’t just a Great White song to them. Uncrunch America has a plan to solve that.

Uncrunch America is looking to get people to lend to other people. If you think this sounds like peer-to-peer lending, you are right, Lending Club is one of Uncrunch America’s partners. It’s not just Lending Club though. Supporters also include Credit Karma (of which I should note has a great credit blog that tell me what is a good credit score) and popular online budgeting tool, Geezeo – two companies that I’ve talked with extensively in the past. Throw in On Deck Capital lending to small businesses and a public relations firm and you’ve got an organization with some clout.

However, some clout isn’t always enough. This is where Change.org comes in. This nonpartisan group is simply trying to create a platform where the people can vote on ideas of change. The Top 10 ideas will be presented to Barach Obama on Inauguration Day, January 20, 2009. After that Change.org supports an organization (in this it would probably be Uncrunch America) in getting the idea implemented. The details of all this are a little fuzzy to me, but you can read the FAQ here.

So if you think that this idea for helping make credit available should get Barack Obama’s attention, please vote for Solving the Credit Crisis From the Bottom up at Change.org. I would stress that this is the last day for round one (I just heard about the campaign myself), so you may have to put down your champagne for a minute or two. However, it’s close to reaching round two, and if it does votes there will be appreciated as well. Sadly, you do have register for the site, but the sign-up form is 4 input boxes and took me about 45 seconds of my time. I figure it’s the least I can do to give the idea a shot.

What Happened to Prosper on Lazy Man?

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Last week, Get Rich Slick asked the question, What Happened To All The Prosper.com Blogs? Two years ago, along with RateLadder, I probably wrote about Prosper more than most personal finance bloggers. So when RichSlick asks why the blogs have seemingly gone silent, I feel that I should stand up and answer.

Here are the 2 main reasons I think bloggers (myself included) aren’t writing about Prosper as much any more:

  • It’s Getting Old – Peer-to-peer lending was a new asset class for the average investor. I think any time a new asset class comes around, people are going to want to write about it, dissect it, and analyze it. That’s been done over and over the last two years. Is there a new angle to write about? I’m out of things to write about unless they add new features like bidding though the API (something announced at the last Prosper Days, and I’m not sure if it’s being used by anyone or not).
  • The Returns Aren’t Where I Thought They Be. When Prosper came out, I used the Experian default as my main guideline. It seems that Prosper loans default a lot more often. I don’t know if I was just not informed enough to realize that differences between the Experian data and the loans I chose to participate in. For instance, I know that the Experian data applies to debt-to-income ratios under 20%, but at the time I figured that 25% wasn’t too much different. And I didn’t look at other information like delinquencies as I didn’t know how to process it. I basically made the mistake that a lot of mortgage lenders did – I took on too much risk. Unfortunately, I wasn’t a lending professional and the government won’t bail me out.

Here are some other comments I wanted to get in, while on this topic:

  • Tricky Math – The next day after asking the question, Get Rich Slick Fishes Through LendingStats To Learn About Prosper. He takes the top 10 lenders (by money invested in loans) and calculates that the estimated ROI at 1.518%. If you look at the page he uses, the 10th person is the worst lender of all… 15% worse than any of the other 25. If he had chosen the top 9 he would have had a 3.70% return. If he does the top 25 people the return jumps to 3.36%. If you take out the best and worst lender in that top 25, you have 3.94% return. (Note, I’m using a simple averge, not a weighted average because I’m Lazy). I’m not going to say that a 3.50% is great (I think you can do better at some banks), but it defintely beat my stock returns of late.
  • People’s Rate of Returns May Look Worse Than They Are – Here’s where the data gets even trickier. Prosper is always changing and adding new features. When I made most of my bad loans, I didn’t have their tool that says, “People who made this bid on a loan like this have an estimated return of -10%.” That’s powerful stuff. It changes your lending practices. Also, people may change their lending practices as they learn. I didn’t know that delinquencies were that important when I started. A few bad loans in the beginning can really torpedo your overall returns. However, those bad loans become less “impactful” (is that a word?) over time. If you look at the top 10 lenders mentioned before, they typically were early adopters and likely victim to these bad decisions.
  • What About Other Market Conditions? – People are likely going to pay off their mortgages before a peer-to-peer loan. After all, it’s their home! Yet we see that many people aren’t able to pay back their mortgages. It’s the worst it’s been in years. Perhaps judging Prosper’s performance now is like judging the stock market in 1929. If the economy gets back to normal, one could reasonably expect that fewer people would default on Prosper loans, right?
  • Lending Club is Performing Great For Me – I have 60 loans with Lending Club. Of those 60, 6 have been fully repaid, 53 are still current, and one is 16-30 days late. (The late one has already repaid 20% of the loan, so if I eat that one it’s not bad). My weighted average interest rate on these 60 loans is 9.21%. While this is not Prosper, the concept is the same. It’s great… I love it… I’m making a lot of money… ;-).

I stand by what I’ve said over a year ago… You have to treat Prosper loans like bonds – and that’s essentially what they are, right? I don’t know anyone who invests in a diversified bond fund and says, “It’s great… I love it… I’m making a lot of money…” Instead, you are going to say, “I’m more diversified than I was. I recognize that investing isn’t about making a lot of money quickly. I love that I didn’t lose 30-40% of my money in the stock market.”

Zopa US is Dead

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I hope you really like to hear about peer-to-peer lending news. Earlier today, I wrote about how Lending Club opened for business again and just before Prosper died (not in the traditional sense, just closed it’s doors for a potentially “several months” while it passes a few steps with the SEC).

However, I really wanted to write about Zopa US dying. I know I’ve been fast and loose with the “[insert peer-to-peer company] dying” phrase in the past, but this is truly the case this time. Zopa US has officially announced that it’s closing it’s doors.

I’ve said it before and I’ll say it again, Zopa wasn’t a pure peer-to-peer lending company. Sure you could buy a CD and offer to help out complete strangers. I don’t know why’d you’d do that when you could buy a CD from a local credit union and help someone in your community.

It looks like my experiment to get a negative interest rate at Zopa has come to a close.  It didn’t work anyway.  I’d like to give a big thanks to Prosper Lending Review for passing on the tip, since I hadn’t been following them very closely.

Prosper is Dead

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Just a few hours after I received an e-mail from Lending Club announcing that they were open again, Prosper sent an e-mail saying that they were beginning their quiet period. This is just over 6 months after Lending Club entered it’s quiet period. I believe that Lending Club got out of it’s quiet period quickly due to a partnership with an existing broker member, FolioFn. It doesn’t sound hard to believe that Prosper will go quiet for another 6 months.

The quiet period sounds a lot like Lending Clubs. There’s not much indication how long it will take, but the indication is several months. During this time lenders won’t be able to lend and people won’t be able to sign up as lenders in the meantime.

Regular readers may note that the title to this post is a tongue-in-cheek reference to my previous post Lending Club is Dead. In honesty, I think that Prosper’s huge first mover advantage over other peer-to-peer lending platforms, gives me more confidence that they can weather this storm than Lending Club did. In addition, we’ve seen Lending Club come through and resume business, so there’s hope that Prosper can duplicate those results.

I feel that people should be asking a very important question here. Why is the SEC focusing on Prosper and Lending Club? Is it for consumer protection? Where was this regulation and scrutiny when banks were making mortgages so bad that a 3rd grader could realize the problem? Where were they when these CDOs we being created? While Americans lose more than a trillion dollars (between stock losses and bail out packages), the regulators are focusing on the small amounts of money the Prosper and Lending Club service. In the immortal words of Seth and Amy from Saturday Night Live, “REALLY?!?!”