Someone offers you a 99% probability of earning 8% to 12% per year…
a. Ask them if they’re related to Bernie Madoff, then quickly back away.
b. Shut your eyes and give them your last cent to invest.
c. Pause… then tell them to prove it.
If you chose option “c,” today’s article is for you…
Today we’re going to look at the official results from a high-yielding crowdfund investment…
And then we're going to look at the exact steps to take if you want to reach the 99% success rate.
You see, last month, we wrote what turned out to be a popular article >>
It was about earning double-digit yields through crowdfunding – not from equity crowdfunding, which we usually write about, but from crowdfund lending.
Crowdfund lending (or “peer-to-peer lending”) is where individuals – regular people like us – pool our capital and lend it to others.
Yes, we know: it sounds crazy.
But the leader in this sector, Lending Club, has made over $3 billion in loans so far… and paid out more than $300 million in interest to investors.
Lending Club recently published some new statistics on investor returns – and some insights into how they achieved those returns.
Let’s take a look…
Don’t Be the 1%!
Making money is great – but first let’s make sure we’re not the 1% who lose money.
Like most types of investing, the winning strategy is about diversification.
In the case of Lending Club, this means you can’t just invest in a handful of loans – they call them “notes” – and expect to do well. You need to build a portfolio.
According to Lending Club, over 99% of their investors had positive returns if they:
1. Built a portfolio by investing in 100 or more notes, and
2. Had no single note that accounted for more than 2.5% of their total investment
To meet these criteria given Lending Club’s $25 per note minimum, you’d need to invest $25 into at least 100 different notes.
That’s a $2,500 financial commitment.
Bottom line: If you’re not planning to make at least a $2,500 commitment to Lending Club, step away from your computer… do not invest on Lending Club!
To see some best- and worst-case scenarios, play around with this powerful chart >>
By changing the controls on the right of the chart, you can see how historical portfolios with 100, 250 or 500 notes performed over the entire life of the investment.
There are other ways to diversify beyond the number of notes in your portfolio.
To enhance diversification, consider investing in notes across the risk-spectrum – i.e., from the lowest-risk “A” notes, to lesser-quality “D” and “E” notes.
Keep in mind the obvious:
Lower-rated notes with higher interest rates may look appealing – and should be considered for portfolio inclusion – but they’ll likely have higher default rates.
Conversely, higher-quality notes with lower rates will tend to be more stable. Because defaults are lower, the advertised rates won’t decline as much over time.
If you invest significant capital all at once, you’ll be exposing yourself to a single “vintage.” If the economy falls off a cliff next month and unemployment rates go up, your returns could be affected.
Ideally, you’d invest over time, providing yourself with exposure to a variety of economic climates.
Don’t Be A Lending Club Snob
Lending Club is the leader in the space – but a company called Prosper is doing well, too.
These two companies have different underwriting strategies – thus, they’ll provide investors with different types of returns.
Consider spreading your risk by joining both Lending Club and Prosper.
If It’s So Easy, Why Do People Lose Money?
Some folks who give Lending Club a chance are disappointed or angry when their returns are sub-optimal or even negative.
People invest in 5 or 10 notes, lose money – and then scream Bernie Madoff!
But if you invest in just a few notes, you should expect to lose money…
You’re not diversified.
Read through the stats page again – and commit to investing in at least 100 notes!
One More Reason to Consider It
If you’re looking for one more reason to explore P2P lenders like Lending Club, here it is:
I’ve been a guinea pig for several months.
I’m heavily diversified, and my portfolio of notes on Lending Club leans towards higher credit quality. My annual returns are about 8%.
I could potentially get more if I were willing to take more risk.
Now that I’ve written this article, maybe I will…
Happy Diversifying -- And Happy Investing!