Author Topic: LC vs Stock Market, a View from the Rear View Mirror  (Read 9552 times)

Rob L

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LC vs Stock Market, a View from the Rear View Mirror
« on: September 05, 2014, 05:31:23 PM »
Thought it would be interesting to compare the returns to date should the funds I've invested in LC loans to date had been invested in stocks. My preferred "market index" investment is the SPY ETF for numerous reasons. The dates and amounts are those of my LC deposits. The SPY price is the close on those dates.



I think the calculations are self explanatory.

My question is how things stack up on a risk adjusted basis. Can't quantify LC risk. If I could eliminate the possibility, however small, of a disastrous LC failure maybe I could make some sense of it but it is non-zero. LC says don't invest more than 10% of liquid net worth so I'm certainly taking their advice.


SeanMCA

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #1 on: September 05, 2014, 05:57:03 PM »
what is the standard average return for the stock market though? 10% a year before inflation right? I think the returns will probably come up just about even over the long term.
I'm a merchant cash advance veteran exploring the p2p lending waters.

AnilG

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #2 on: September 05, 2014, 06:03:36 PM »
Two suggestions:

Compare LC Return with a Bond ETF such as JNK, HYG. It will also give you some idea of LC risk in comparison to Fixed Income securities. LC is a fixed income investment and not equity investment.

If you are using LC Adjusted account value from LC website. Reduce the account value by deducting the loss rate from the outstanding principal for current loans. Loss Rate = Amount Lost to Default / Outstanding Principal.

I expect LC returns should be similar to JNK or tad higher.
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Randawl

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #3 on: September 05, 2014, 07:21:50 PM »
Two suggestions:

Compare LC Return with a Bond ETF such as JNK, HYG. It will also give you some idea of LC risk in comparison to Fixed Income securities. LC is a fixed income investment and not equity investment.

If you are using LC Adjusted account value from LC website. Reduce the account value by deducting the loss rate from the outstanding principal for current loans. Loss Rate = Amount Lost to Default / Outstanding Principal.

I expect LC returns should be similar to JNK or tad higher.

I agree.  Interestingly enough, some of my LC funds came from my JNK holdings!   

GS

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #4 on: September 05, 2014, 08:17:15 PM »
The last couple of years have been pretty extraordinary for the S&P.  Long term, I've heard averages are more like 6-7% per year annualized and adjusted for inflation, which is pretty much on par for what LC claims. 

Rob L

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #5 on: September 05, 2014, 08:35:32 PM »
Compare LC Return with a Bond ETF such as JNK, HYG.

That's on the "to do" list. HYG is my preferred ETF there. Think I'll look at TIPS too. So many ETF's so little time...

I just thought to mention that HYG (and SPY and TIPS) are quite liquid whereas I must hold my LC notes to maturity over years since my account is IRA.
What is the value of liquidity (can I get my money if I suddenly need it)?
If HYG (or JNK) has similar risk / return why would I prefer illiquid LC notes?
I should be paid more for the loss of liquidity (or by definition LC notes must be inherently less risky). Who can say they are?
« Last Edit: September 05, 2014, 08:59:06 PM by Rob L »

Randawl

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #6 on: September 05, 2014, 08:57:00 PM »
The last couple of years have been pretty extraordinary for the S&P.  Long term, I've heard averages are more like 6-7% per year annualized and adjusted for inflation, which is pretty much on par for what LC claims.

I also have read that historic S&P averages are roughly 6-7% per year annualized and adjusted for inflation (not that it's always going to be that way in the future).  However, returns of matured LC loans have actually averaged 6-7% (or less)* before adjusting for inflation.


*Actual ROI of all "completed" loans according to NSR is  -3.44% to 5.99% (also before inflation).  And 3.69% to ~7.55% according to PeerCube (also before inflation).  Although, AnilG's calculations recently changed so I am not sure what his confidence level is in those numbers at the moment.

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Thatguybil

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #7 on: September 06, 2014, 12:12:55 AM »
I think the comparison to HYG is a good one.
LC does not have the liquidity of HYG.

The funds that I have in LC came from the bond portion of my "portfolio".

Fred

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #8 on: September 06, 2014, 02:42:49 AM »
In late 2012, LC produced an article titled "Five Year Review: Lending Club Notes Outpace Stocks and Bonds."

http://blog.lendingclub.com/five-year-review-lending-club-notes-outpace-stocks-and-bonds/



Things have changed since then, but I think 5-yr horizon is a better/more realistic way to compare SP500, high-yield bonds, and LC.

And it goes without saying, past performance does not guarantee future results.
« Last Edit: September 06, 2014, 12:48:23 PM by Fred »

yojoakak

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #9 on: September 06, 2014, 03:54:10 AM »
Stock Market? I got into LendingClub as an alternative to a bank account, back when rates started dropping again, and then my money market account "broke the buck."


http://www.pfstuff.com/savings/#historical
https://en.wikipedia.org/wiki/Reserve_Primary_Fund
« Last Edit: September 06, 2014, 04:00:00 AM by yojoakak »

rawraw

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #10 on: September 06, 2014, 07:11:52 AM »
Averages aren't very useful when comparing returns.  You want the standard deviation of those averages.  Also, you want to know how fat the tails are.  And then you want to know how correlated the asset is to the rest of your portfolio.  We don't have a business cycle yet, but I'm under the impression the consumer loans will be less volatile, skinnier tails, and not very correlated to the S&P.   

cfb

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #11 on: September 06, 2014, 05:30:40 PM »
Couple of tidbits...

LC debt is going to be considerably more risky than a high yield corporate junk bond fund.  Defaults on most of those are nowhere near the default rates of LC loans, and you've got a good chance of at least a partial recovery on defaulted corporate debt.

Risk of loss vs risk of volatility are two rather different animals.  Unless the company you own stock in goes bankrupt, a market crash can be erased by waiting for the prices to recover.  In an LC loan, your money on a default is gone.  Waiting a while won't fix that.

Comparing unsecured loan income to equities during a period of high persistent stock market price increases and at a low period for interest rates is like comparing apples to squid.

Risk of correlated losses is a big problem.  Should we fall into another economic hole in the ground like 2007/2008, the stock market will drop and you'll see a bananas number of LC defaults as people lose their jobs or reprioritize which bills they're going to pay.  Although a stock market drop in the absence of a serious economic problem/job losses shouldn't affect LC loans that much.

I've been an LC investor for largely a couple of reasons.  Aside from equities, you can't make a decent risk adjusted return on just about anything and that'll stay that way for a while.  I needed steady income for about three years from a 60k lump of cash I didn't want to put into equities.  I wanted to make at least 5% on that lump of cash.  I'd normally buy a high yield bond fund if a good one had an 8-9% return, but they're paying half that.  I'd buy some 5-6% cd's, but the last time I could do that was 7 years ago.  I'd rebalance my 95% equities portfolio into a 60/40 or 50/50 with high quality corporate debt if I could get a 4%+ dividend out of that, but I'd get about 1/3 of that payout and bonds are going to get punched in the face when rates go up, so that'd be a mistake.

I says I've *been* an investor because the game now is a lot different than it was a couple of years ago.  I could never deploy 60k into this product now and get the ~10% returns I've gotten if I started today.  And I wouldn't take on the risk of lending unsecured money to strangers on the internet who clicked a banner ad for LC for <10%.

Rob L

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #12 on: September 06, 2014, 07:17:10 PM »
As promised here's the HYG vs LC performance comparison:



Perhaps a less apples to squid look, no?
I reinvested the dividends since that's what I've been doing with my LC account.

My problem is that I don't have a very good handle on how to risk adjust the squid. A 100% loss is far from impossible.
The worst stock market loss was about 75% going into the great depression (but I'm sure it felt like 100%).
Risk of ruin limits my LC participation, as does lack of liquidity, to much less that I would otherwise like to commit.

rawraw

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #13 on: September 07, 2014, 07:30:46 AM »
Couple of tidbits...

LC debt is going to be considerably more risky than a high yield corporate junk bond fund.  Defaults on most of those are nowhere near the default rates of LC loans, and you've got a good chance of at least a partial recovery on defaulted corporate debt.
But corporate bonds don't amortize, making it harder to compare. 

AnilG

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Re: LC vs Stock Market, a View from the Rear View Mirror
« Reply #14 on: September 07, 2014, 11:42:49 PM »
Great work. Thanks for all the time and effort you put in. Is the LC Adjusted Account Value directly from LC Summary page, i.e. you applied the same loss rate to late loans as LC does? What will be your LC adjusted account value if you reduced the balance on current loans by 3%.

As promised here's the HYG vs LC performance comparison:

Perhaps a less apples to squid look, no?
I reinvested the dividends since that's what I've been doing with my LC account.

My problem is that I don't have a very good handle on how to risk adjust the squid. A 100% loss is far from impossible.
The worst stock market loss was about 75% going into the great depression (but I'm sure it felt like 100%).
Risk of ruin limits my LC participation, as does lack of liquidity, to much less that I would otherwise like to commit.
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com