Step3 Prophet

Lending Club Numbers Revisited

  In 2008 I did a post on expected returns from using the Peer to Peer loan service Lending Club. It's been just over a year now, so what better time to take a look at the results? (Thanks mike for the comment on my other post).
  I'll come out and state right now, it's not as rosy as my initial assessment led me to believe(O RLY?). Much as the initial Propser investors took a beating, so have my first LC investments. I made the post when LC was still getting started, and there was a lack of historical data at that time, so I used the historical data for traditional loans that LC had on their website. Also, I wasn't as savvy about how to invest in loans at that time. Now you can take the historical data that they post on the LC website and do calcs with actual results. Interestingly enough, LC quite period last year provides a clear demarcation between my old and new loan strategies. But enough chat, here is a screen shot of my portfolio of "Old Notes".
 

Click to enlarge the image if you can't read it. It shows that of my 225 original loans, 10 are charged off, 16 are in default, and If you count those 1-4 months late as defaults, then that is 38 loans total in default. That makes almost 17% defaults. That's not terrible, but keep in mind that this is only after 1 year. These are three year loans, so most have about 2 years left to be fully paid. Also not that good either, since my original calcs show give a annual rate of return of around -1%.

  So how am I actually doing? If you look at the interest earned versus the defaulted amount, it's a net gain for me, but not by much. About $1029 defaulted, compared to $1,133 in interest payments gives me a prophet so far of $104 You can slice that value a number of ways, but since the payment/default process is still on going, and I don't want to delve into statistics tonight, I'll just leave it at that. The reason I have a profit vice the loss my original calcs showed is due to the assumptions made(ie, the loan defaults at origination, and all loans are of equal value). My actual portfolio is not homogeneous, and, of course, not all loans default right away.
  What this really means to me is that I'm not being adequatly compensated for risk(ie the interest rates on high risk borrowers is too low). Lending Club's interest rate model assigns an interest rate based on a number of risk factors, but I suspect that the for the D,E,F,G category notes that interest rate is too low. It's a tough choice, because if LC sets the rate too high, poor credit loanee's will not even apply. Plus I don't want to gouge people, I want to help them out of those high interest credit cards or bills. Some of it is also my fault for not being careful how I invested in the those old notes.
  So what can a person who wants to invest in do to mitigate the risks? First, only invest the minimum amount in any particular loan. This allows for greater loan diversity, and minimizes the chance that one loan going bad sinks your whole portfolio. I actually have a loan like that in my old notes. Thankfully the borrower has proved to be trustworthy so far, but I will never again go out on a limb for a single borrower, no matter how good there profile looks. The fact is, you can't really know the borrowers situation, or even if you do, it could change during the 3 years of the loan.
  Second, weight your portfolio toward the A,B, and C categories. You don't have to limit yourself soley to them, but the compensation isn't there for a large portfolio of low grade loans. Here is a snap shot of my current "new" note portfolio.

Most of the loans are about 3 months old, so there is not much of a history yet. This newer portfolio is definatly more risk averse, but by following the two principles outlined above I think my overall yield will be much better.

Awesome V-Day Weekend

This was an awesome three day weekend for me and Mel. She's here with my in San Diego before I make the transition to Japan, so we are making the most of it.

On Saturday we went to the San Diego Zoo. It was very nice as zoos go, although zoo's make me feel sorry for the animals kept in small cages (especially after seeing the Point Defiance zoo!). On the bright side, I got in free with my military ID. It turns out that three major attractions in San Diego offer free entry to military: The SD Zoo, the Animal Park, and Sea World. The cost is normally $35. While we were at the zoo we met up with some friends of Mel. I ended up getting a gorilla hoodie because it was a bit chilly. That evening we went downtown to look around and have dinner. We didn't make any reservations, we just walked around the city taking in the sights. We ended up at Las Hadas because they offered us a free appetizer coupon at the door and it wasn't that busy. It's a recently opened restaurant with an urban Spanish theme. The food was quite good, and the service was some of the quickest I've ever seen. The interior decor is urban night life with a mix of Latin pop and English music coming over the speakers.

On Sunday we chilled for most of the day and then went to the Fashion Valley mall.  Some of the worst parking I've ever seen for a mall. It was yet another of San Diego's open malls, and the store selection was impressive. It was the first time I've seen a Sony store before. Our big purchase ended up being from The Art of Shaving. An upscale shave store, who knew? Mel bought me a travel shave kit with a pre-shave oil, shave lotion, a badger hair brush to lather with, after shave, and a fancy blade handle for disposable razor heads. I'm still trying it out, so I'm not sure it it's worth all the extra effort, but it is an interesting experience. The lady at the store was enthusiastically giving demos. After the mall we went to dinner at an Italian place in Point Loma called Solare. It was well worth it. I had a black ink pasta stuffed with broccoli and sea bass in a tomato lobster sauce and Mel had sausage potato dumplings that were very rich. Portion sizes  were just right, but it was a little on the expensive side.

On Monday it was crazy weather for San Diego: Cloudy skies, high winds, and heavy rain. We stayed inside and listened to the sound of the waves crashing on the beach and the wind blowing. That evening we went to visit some relatives of Mel's who live in El Cajon. They were very nice, and fed us dinner.

All in all pretty good.

The magic of Skype phone calls

I've recently become a huge fan of Skype (in case the headline wasn't enough of a tell). Skype is a computer program which allows users to make voice and video phone calls over the web. I'm a little behind the times, since I've known in the back of my mind that this was possible for quite a while now, but I've never really had a reason to use it. Wikipedia tells me it's been around since 2003.

Now that I'm stuck 1000's of miles away from the woman I love, and am going to be going further still, it made sense to explore this option. It also helps the my EEE PC comes equipped with a built in web cam and a version of skpye pre-installed. The pre-loaded version was somewhat outdated, but installing the latest version was quite simple.

I've been using it now for a few days and I am quite impressed. The best part of skype is that PC to PC calls are free. Thats video and voice. Calls can be made to a land line or a mobile phone as well for a fee. The call quality is decent, and the video quality is not too bad either. I don't know if the video is limited by the poor quality of my camera, or by bandwidth limitations, but over all the quality is fine for my purposes.

I expect this will save me and my sweetheart quite a bit of money while I'm traveling in foreign lands, but it can also be useful to see friends who you haven't seen in a while. Even though I could call them on my cell, a video would be nice as well.

To learn more check out Skype's website.

 

Rental Car insurance

I'm back from my trip to Dallas. It was a whirlwind of friends and family and I had a lot of fun catching up with people I haven't seen in over a year. The only down part of the trip was the rental car. I hate renting cars. It's next to impossible to get a good deal on one. Even the price they quote you on the web usually doesn't take into account extra fees and taxes and there is always the question of getting add ons and insurance.

I ended up renting a car for 3 days to go visit my grandparents in Houston. As I was driving the car back to my parents house the night before I was leaving for Houston, I was blessed with two flat tires on the passenger side. Talk about crazy bad luck. I called the rental company assistance line and they sent out a tow truck and brought me back to the rental agency, and the rental agency set me up with a new car at no additional charge (for the rental). I am, however, stuck with the fees for towing and tire replacement because I didn't have any kind of insurance on the vehicle except my own ordinary policy. Since then I've done a little research and in general you have three options:

Rental Company Provided

The Rental companies love to sell you additional insurance. The company I was renting from had offers ranging from $20-$50 per day. PER DAY! For three days that would be at least sixty dollars. I'm getting ready to rent for two weeks. That would be an additional $280-$700. The rental itself is only $300! That is kind of hard to swallow. For my little blow out incident, if I had taken the $20 a day coverage then I would have come out ahead overall on. However, if something similar happens during the two weeks I'm renting the resulting repair cost would be about even. How cost effective it is to buy the extra insurance really comes down to how often you rent, and what your normal insurance covers.

Your Regular Insurance Provider

I talked to my insurance company about what would be covered during a rental. Pretty much all the same coverages apply to the rental car as to my regular car. In terms of accident and personal liability I'm covered exactly the same, as well as for road side assistance. (which I didn't have at the time, but that's another story). Something as minor as tire repairs won't even meet my deductible.

Third Party Insurance (ie credit card benefits)

I have a number of credit cards for various reasons, and my American Express card has the benefit of offering additional insurance for rental cars (among other things). If I had used this card, I might have been covered for the tire repairs ( but not roadside assistance). I don't normally use it for anything, so I didn't have it with me at the time. This benefit is a secondary insurance, which means it only pays for things after your other means of insurance has paid out. A representative I spoke to said that would cover my deductible from my regular insurance. There is also an option from Amex to sign up for a primary insurance with greater coverage. For $25 a rental they will cover theft or damage up to $100,000 for 42 days after you rent. If you sign up it is automatically charged at the time of rental. That sure beats $20 per day!

Which is best for you?

That depends on a number of factors, but I think the biggest would be how often you rent. If you only rent a car once or twice a year for a few days at a time, the piece of mind offered by the rental company's policy is probably best.

If you rent frequently then all those insurance fees are going to add up pretty quickly and you would be better off finding another option.

If your regular insurance is spectacular, then you may never need to buy additional insurance. Just be sure you know what coverages you have before you go declining the rental companies offer.

Maximizing Savings Through Your Work

One of the best ways to save for retirement is through your work. If your company offers a 401K or similar program, it's hard to beat the tax advantages that saving that way can offer. I've been contributing regularly to the governments TSP(Thrift Savings Plan) program for years now, but never in any great way. They don't offer matching contributions for military members, so I've been more interested in investing in a Roth IRA and limiting my TSP contributions.

This year however, I've already made my full annual IRA contribution. That means more money each paycheck for me! Alternatively, I could take the extra money that I would have invested in my IRA and switch it to TSP. Of course, there is the holy grail of retirement saving: Maxing out my TSP contributions. For 2009 that limit would be $16,500 (the same as a 401K). That is quite a chunk of change. It comes out to $1,375 per month. Can I possibly afford to save this much? Currently I'm saving about $500, and combined with the money I'm not contributing to an IRA that would be about $900. That means I'd have to devote an additional $475 each month to long term saving.

It's tempting, and I'm pretty sure I could pull it off, but right now my entire life situation is in a state of flux since I'm moving to another country. There are a few unknowns that could come back to bite me, so I'll be a little careful here. I'm definitely increasing my contributions, but not quite to the max. Once I'm settled in my new local, I'll reevaluate my situation.