Earlier this week, a deal was reached on the Greek debt crisis.
With a meltdown averted, the interest rate on Greece’s 10-Year Government Bond stabilized at about 12%.
If you’re searching for yield, a 12% yield is obviously enticing—but would you be comfortable investing in Greek debt?
We sure wouldn’t.
But given today’s low interest-rate environment, where else can you get yields that even approach that level?
Today we’ll show you exactly where.
The “Private Bond Market”
Unlike the “Private Stock Market,” where you invest in a private company and receive a stake of the business, today’s article is about the “Private Bond Market.”
The Private Bond Market, also called “Peer-to-Peer Lending,” is where regular people like us pool our capital and lend it to others.
Borrowers use our loans, typically $15,000 to $25,000 in size, to pay down high-interest credit cards, or to make a big purchase like a new car.
Yes, it sounds crazy…
But by cutting out the traditional bank as a middleman, borrowers pay lower interest rates, and lenders like us can earn significant returns.
Let’s take a look…
The leader in this sector is a company called LendingClub (NYSE: LC).
As of the end of March 2015, LC had made nearly $10 billion in loans…
Before fees and defaults, yields have ranged from 9% to 14%—and after fees and defaults, lenders have earned average returns of about 6% to 8%.
You can select which grade of note to invest in depending on your investment goals and risk tolerance, from “A” to “G.”
Historically, “B” grade notes have returned 7.23%, and slightly riskier “C” grade notes have returned 8.74%.
I’ve been investing in LendingClub loans for about 18 months. Diversification is critical, so I have a big, diversified portfolio.
Overall, my annual returns are running at about 9%.
But LendingClub isn’t the only game in town:
Other high-quality “P2P” lenders include Prosper (which recently topped $4 billion in originated loans), and FundingCircle.
And as P2P lending has become mainstream, now we’re seeing these lenders partner with traditional banks:
LendingClub, for example, recently formed a partnership with Citibank, and FundingCircle now has a partnership with RBS.
Risk Management (In Three Simple Steps)
But even with market-beating returns, the validation of LendingClub’s successful IPO late last year, and mainstream partnerships, this is still a young industry…
It hasn’t yet gone through a bear market, or a major economic downturn.
What if some worst-case scenario happens? Would all these P2P loans “go bad,” leaving lenders with pennies on their dollars?
Well, the good news is that at least one rigorous study suggests that a “black swan” disaster wouldn’t be so disastrous—evidently, these are like "crisis-proof bonds."
But since you can never be too careful, here are three easy ways to protect yourself:
Asset Allocation – Despite the lofty yields, only invest a small amount of your assets into alternative lending.
Invest in Many Loans – LendingClub, for example, has published results showing that 99% of investors had positive returns if they held more than 100 loans.
Lending Club has a $25 per loan minimum, so to meet these criteria, you’d need to invest $25 into at least 100 different loans. In other words, if you’re interested in P2P lending, plan to invest at least $2,500.
Happy Diversifying—and Happy Investing!