This year has been great for stocks, including dividend stocks. I
have not put any fresh capital into my stock portfolio, and only
re-invested proceeds just once. I've been on the sidelines most of the
time, waiting for two conditions: sufficient dividend proceeds to build
up cash for another investment round, and good entry points for quality
dividend stocks. I'm right at a point where the first condition is
satisfied and will be more actively looking for good stocks.
I've
been wanting to diversify from dividend stocks, and stocks in general,
but never found a good options. I don't want to be a landlord, it's too
much hassle, too illiquid, and too much of a gamble unless you do it
large scale. So when I recently read about LendingClub, I figured I'd
give it a try. LendingClub is a peer-to-peer lending company. There are
others like Prosper, but LendingClub came best out of the reviews I
read. They did have some fraud issues earlier this year, but that seems
to be behind them now. I'm not going to review LendingClub here, but
I'll share some experiences.
High
level the system allows people to get a loan, with each loan chopped
into small notes that are backed by investors. For example a note can be
$25, so a $10k loan is backed by 400 notes. As investor you invest in
notes from different loans to reduce your risk. There are different loan
grades based on the applicant's credit rating and other factors. The
return is based on the interest rate and reduced by any loans that are
written off if they default.
It's
only been a week, so no real numbers yet. I opened an account,
transferred $2500 into it, and had to wait a few days for it to clear. I
signed up for Automatic Investments, where you select a risk/return
profile and the system will invest for you. I figured this is good for a
start to get a feel for the system. On Monday my money was in the
account and gradually used to fund different loans. You'll have to wait
until a loan is fully funded (e.g. investors have picked up all the
notes to back the loan), and then the loan gets issued. Within a week
90% of my notes were in issued loans, and I expect my first payments
early November. The remaining 10% are being issues, meaning their loans
are fully funded, and I expect them to be issued early next week.
I'm
curious about a few things. First I want to see how long I can keep a
'perfect record', meaning no defaults, charge offs or even late
payments. I have some high risk loans in the mix, and I expect it won't
be long. Second, I'm curious to see how quickly I get back enough money
to buy another note. Now that my initial investment is put to work, I'm
debating if I should re-invest the returns in a different way -- more
risky or less risky.
The
next item I want to learn about it the secondary note market. I'm sure
people have figured out the right time to sell a note to optimize their
profits. Notes that are way past due could be charged off, or possible
sold for a dime on the dollar to recoup at least some of the initial
investment. I'll have to read up on it and see what I want to do. The
easy thing is to just let things ride, but I want to see how much time
it takes to manage it for more optimal returns. After all, I'm actively
building a passive income portfolio.
