This is a series of guest posts from New Jersey Guy who is an active member on the LendAcademy Forum. He is located in New Jersey as his name suggests so he is not currently able to invest in notes directly through Lending Club. However, he has decided to share his secrets on investing in FolioFN - the secondary market for Lending Club. There will be 4 posts in this series that will outline 3 of his strategies that can help you break the mold for better returns with Lending Club.
Let’s get started:
One of my more outspoken colleagues on the Lendacademy forum just recently summarized the majority of Peer-2-Peer investors with a very straightforward, hard-hitting statement:
“I have never understood why people insist on participating in the 4x daily rat race. Besides psychological issues, the only answer I can come up with is that people’s usual filters and tools do not work the same for Folio and they are unwilling to do anything different from what they’ve always done. They’d rather set their alarm clocks each day for eternity than spend some time learning something new.”
Yes, we were led to believe that we could make 10% to 15% easily, by simply jumping on our computer certain times during the day and gulping up as many fresh issues as we can. The hard truth is, many investors found out they weren’t making these returns. Late notes and Charge-offs haunt their portfolio, dropping their returns considerably (or to a more realistic number). “I gotta reduce my risk! I gotta reduce my risk! Risk…risk…risk!” Have you ever noticed that most of the articles you read about P2P lending has to do with risk? Either the article tells you how risky it is, or they go on forever on how you can reduce your risk by some miniscule amount. So what do people do? They spend days, weeks and months sweating over statistics in order to find that magical filter that will reduce their risk.
Don’t get me wrong. Filters are very important. I use them. You do get better returns with good filters. But the inevitable truth is that even with the best filters, there is always going to be risk. So all of this work is going to what? Trying to squeeze a tiny bit more out of their portfolio? How much more blood can you get from the same rocks?
I just read an article on building your retirement fund. There was a really interesting point. The author said don’t spend all your time looking for a fund that will pay you 1% better than the other ones. Spend your time EARNING MORE DAMN MONEY! It makes sense! If you all got a $20,000 annual raise at work, how much more could you deposit to your retirement funds?
Okay, it is slightly absurd. We would all like to find a job that pays $20K more a year, but I don’t think any of us will quit our current jobs tomorrow. Let’s face it. You can’t fund your P2P account with food stamps or government cheese while waiting for a better job. However, the point I am trying to make is that you can increase your P2P yield if you break out of the standard mold and take the time to try something new.
Everybody knows I am no financial wizard. I have no finance background. Calculators confuse me. I use a flip phone because the smart phones are smarter than I am. The clock on my VCR still isn’t correct. Heck, last year I had to Google the terms ROI and IRR just to find out what people were talking about.
Yet, my Return-over-Investment (ROI) for 2013 was over 70%. My IRR on 12/31 was 144%. And I did it without purchasing a single note off the Lending Club Platform. I can’t! I live in New Jersey! I’m one of the 24 states that are not allowed to directly invest in notes from Lending Club. I have to turn to Folio in order to participate. Now I will admit, most of my returns were the result of dealing with highly speculative notes. Losses make up part of my daily returns. The difference between most investors and myself is that I don’t let losses bother me. Instead, I continually put my effort into searching for notes that are profitable while accepting the risk. Unfortunately, most investors don’t have the fortitude for that type of investing, or, are unwilling to put in the time. So I am not going to get into that deep really aspect of Folio. I will, though, go over a few strategies that anybody can use that will either help reduce risk or offer opportunity for higher yields.
The first thing you need to do right this instant is to set a goal for yourself. You must have a goal! A goal will force you to learn and try different things. Now, I don’t mean an annual goal like “Gee, Mr. New Jersey Guy, I hope I can make an extra 1% for the year”. I mean a MONTHLY goal that is difficult to pursue. Let me give you an example. Let’s assume your account is going to make you $150 in interest this month. Next month put in your head that you are going to increase your account by another $100, or, $250 total. That $250 has to be a combination of interest and Short-Term Capital Gains. It doesn’t make a difference how you get it, just get it by hook, crook or steal. My personal plan goes one step further. If I fail to hit my goal, then I make the difference up out of my pocket. You should consider doing the same. For example: If you set your goal at $400 and only finish the month at $310, the remaining $90 needs to be deposited to your account from your bank account. Does this work? In October, I had to raise my goal. The goals I set last winter were getting too easy to hit, and I found myself sending in small amounts or none at all. Now, if you already are making monthly contributions to your account, THAT DOES NOT COUNT, so don’t cheat! This money has to be in addition to whatever you are sending. Believe me, the aspect of having to pull extra money out of your pocket will keep you motivated! And watching your account increase faster each month will keep you inspired.
Now let’s face a hard fact. $100 in the scheme of life is not a whole lot of money. It costs me $100 per month just for school lunches for my kid. Obviously, you can set your own monetary goal depending on the size your account and income. It could be $100, it could be $500, and it’s up to you. Besides quitting your job to find one paying $20K more, here are two other alternatives:
A.) Take on an additional part-time job for 12 hours a week using the phrase “Is that for here or to go?”
B.) Right now, deposit $7,350 into your Lending Club or Prosper account. Why? Because it will take that much in new loans to generate an extra $100 of interest next month.
Let’s look at option B a bit closer. Despite the fact $100 is a small amount of money compared to life’s expenses, it’s no small matter in the P2P market. So, making an extra $100 is the same as having an extra $7350 in your account. Therefore, you can take the easy way out right now, make your $7,350 deposit, and be done with this whole thing until next year. Or, take a few of those 12 hours you’d need flipping McBurgers and find a way to generate the income without making a big deposit. But if you decide to take this route, it’s not going to be done through Lending Club or Prosper. You are going to need to turn to Folio, and you’re going to need to put in some time.
This is great. I wholeheartedly agree that Folio trading is terribly underrated. The only fly in the ointment is the fact that Folio is not currently connected to the Lending Club or Prosper API, so any automated investing has to be done with screen scraping, a practice that involves more risk than I’m comfortable with.
However, for people who are eager to take the time and filter notes by hand, Folio is an excellent opportunity, and I’m interested in hearing more about how this could be done quickly.
The New Jersey Guy says
Simon….you’re right about that. Currently, the only 3rd party service available for Folio is Interest Radar (www.interestradar.com). I intentionally left this out because of the length of the blog.
Interest Radar is authorized, so there is no worries about scraping risks.
This is my second year on Interest Radar, and I grade the Folio area of this site a Big A++. It’s a must for anybody looking to get serious with Folio.