Author Topic: Prosper as a cash or CD proxy - Advice requested  (Read 5204 times)

johnh530

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Prosper as a cash or CD proxy - Advice requested
« on: July 02, 2014, 09:48:02 PM »
While most people seem to be interested in Prosper to get a high rate of return - I am interested in using Prosper as a cash/CD replacement with a 5 year horizon.

I have retirement money in equities which are moderately aggressive - I have a budget for how much will be needed with a 5 year horizon.  If there were no inflation I would be happy to put that money in cash so if the stock market tanks I will not have to sell stocks at discounted prices.  If stock market performs reasonably then I'll make adjustments in the amount of this money based on future budget needs.

While inflation is not high, CD rates are below inflation so I'm thinking of putting this money into Prosper which seems to have higher than inflation rate of returns even for loans with AA ratings.

My main concern is will I be able to sell my notes on folio if the market tanks and I need the money? - if so how much should I expect to lose in addition to the 1% fee charged to folio?  How long should I expect to unwind things if needed?

Aside from these questions - Do you think I should go for just the AA rated notes with filters to minimize defaults or go for the gold like most people seem to do?

TIA for advice.

johnh...

rawraw

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #1 on: July 03, 2014, 07:04:06 AM »
I'm a LC guy, but depending on when you unwind will impact Folio.  If it is 12 months from now, even selling at a discount will still bring you ahead from where you started (Just not as much ahead if you held to maturity).  You may get a 4% bump instead of a 10% bump or whatever the case may be.  But if you have to liquidate a day after the notes fund, you'll probably take a principal haircut.  And the amount is really hard to say given the little info we have.

Peter

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #2 on: July 03, 2014, 08:49:27 AM »
Hi Johnh530,

Good to hear from you. Most investors on here, as you have surmised, are looking for outsized returns. Prosper has a less active secondary market than Lending Club but you will still be able to sell the majority of your notes easily. The one caveat with Prosper is that you cannot sell notes that are late, so you will only be able to sell your notes that are in good standing. But if you focus on AA-grade notes you will likely have a very small percentage of your portfolio that is late.

I will be happy to chat about this offline if you like. You can reach me through the Lend Academy contact form:
http://www.lendacademy.com/contact/

Best of luck.
Publisher of the Lend Academy blog

See my returns here: http://www.lendacademy.com/returns

faeriering

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #3 on: July 03, 2014, 10:58:00 AM »
johnh,

Just please be aware of the risk you are taking.  CDs and cash in savings accounts at banks are FDIC insured.  This investment vehicle isn't.  The default rate on the higher grade notes are very low, but the asset isn't liquid and it isn't backed by the feds.

edit: corrected the cash statement to be specific about which cash accounts are FDIC insured thanks seattle sun for pointing out the mistake.
« Last Edit: July 12, 2014, 09:53:27 AM by faeriering »

lascott

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #4 on: July 03, 2014, 03:24:55 PM »
What about funds that are/like mutual funds in this space:

1) http://invest.lendacademy.com/#about-us

2) http://www.lendacademy.com/options-for-accredited-investors-at-lending-club-and-prosper/

3) birchmereadvisors.com - great blogs below
Quote
Here is "a series of posts where I’m [advisor] offering my thoughts as to the role of peer-to-peer (or “direct”) lending within the broader context of the investment landscape."
  .
1st http://birchmereadvisors.com/why-peer-to-peer-lending-makes-so-much-sense/
2nd http://birchmereadvisors.com/peer-to-peer-lending-follow-rule-number-one/
3rd http://birchmereadvisors.com/peer-to-peer-lending-why-you-wont-lose-money/
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

digit5

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #5 on: July 03, 2014, 04:21:00 PM »
Once your money is invested in loans every month (actually daily) some amount will be returned to your cash account as earned interest and principal paid. If your average loan return is 10%, monthly approximately 1% of your total notes will be back in your cash account. If you need a small amount of money, this can be withdrawn easily. Or, if you anticipate a need for some money you can let the interest and principal payout accumulate for a few months for that purpose. I have an account with Prosper. Since I don't need to access my investment, for now I reinvest my interest earned and principal paid off right back into more loans.

If you think you may need a substantial portion of your investment out all at once then this doesn't help you.

Fred93

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #6 on: July 03, 2014, 05:11:33 PM »
Once your money is invested in loans every month (actually daily) some amount will be returned to your cash account as earned interest and principal paid. If your average loan return is 10%, monthly approximately 1% of your total notes will be back in your cash account. If you need a small amount of money, this can be withdrawn easily.

Agree with the principal.  The amount is higher tho.

Suppose you have a mix of 36 month and 60 month loans.  Lets call the average 48 months.  Your entire principal is paid back over 48 months, so principal alone averages a little more than 2% per month.  (ie 1/48 = about 2%)  On top of that there's interest, which might be nearly another 1% per month.  Then a significant fraction of borrowers pay off early, so in practice there's even more, maybe another 0.5%   That adds up to around 3.5%/month cash becoming available. 

If you recycle this money by buying new loans, it continues.  If you take it out or fail to reinvest it, then the amount coming out goes down each month. 

This is of course a cash flow calculation, not a returns calculation.

SeattleSun

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #7 on: July 10, 2014, 12:36:15 AM »
johnh,

Just please be aware of the risk you are taking.  CDs and cash are FDIC insured.  This investment vehicle isn't.  The default rate on the higher grade notes are very low, but the assest isn't liquid and it isn't backed by the feds.


This is good news "cash is FDIC insured" as I have $100,000 buried in the back yard and didn't realize the FDIC was insuring it.

Prescott

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #8 on: July 11, 2014, 09:22:04 PM »
Prosper is in no way a replacement for Cash or a CD.

As others have mentioned it is not FDIC insured. I'm comfortable and confident in the platform, even the secondary market which is a bit weak, that their viability and continued existence is not a concern I use in my calculations.

Looking at the interest rates in the grand scheme of things, they are higher than many / most corporate bonds, which should tell you this is just another fixed income investment in your portfolio, not a proxy for anything.

If you are trying to get a proxy, you need to be shooting for AA notes - it's a stretch to even say that AA's are a proxy for CD/Cash. I don't even like that I typed that.

You might consider short term bond fund. These typically invest in short term corporate and muni bonds for a decent return. The short term protects you some what against interest rate risk, which I think is real in the next 5 years (who knows how fast, but they gotta rise at some point). Pulling a random link http://money.usnews.com/funds/mutual-funds/rankings/short-term-bond

Prosper / LC are good places to invest, but they should be viewed in context of your fixed income allocation, nothing else.

lascott

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Re: Prosper as a cash or CD proxy - Advice requested
« Reply #9 on: August 23, 2014, 11:00:14 AM »
Once your money is invested in loans every month (actually daily) some amount will be returned to your cash account as earned interest and principal paid. If your average loan return is 10%, monthly approximately 1% of your total notes will be back in your cash account. If you need a small amount of money, this can be withdrawn easily.

Agree with the principal.  The amount is higher tho.

Suppose you have a mix of 36 month and 60 month loans.  Lets call the average 48 months.  Your entire principal is paid back over 48 months, so principal alone averages a little more than 2% per month.  (ie 1/48 = about 2%)  On top of that there's interest, which might be nearly another 1% per month.  Then a significant fraction of borrowers pay off early, so in practice there's even more, maybe another 0.5%   That adds up to around 3.5%/month cash becoming available. 

If you recycle this money by buying new loans, it continues.  If you take it out or fail to reinvest it, then the amount coming out goes down each month. 

This is of course a cash flow calculation, not a returns calculation.
You have some great financial explanatory communication skills.

Excluding the borrowers paying off early, I calculated the ~3% via the LCs numbers and the Portfolio screen.

=SUM(Expected Monthly Payments) / =SUM(Outstanding Principal)
** SUM is referencing the use multiple portfolios.

Using this our youngest account (2 months) shows: 2.76%
Using this our oldest account (5 months) shows: 3.31%
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y