Author Topic: How should I evaluate my portfolio, help!  (Read 8564 times)

balto21

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How should I evaluate my portfolio, help!
« on: May 24, 2016, 11:54:14 AM »
Been an investor since late 2013. I have read that XIRR is the best way to evaluate. But, is that XIRR off of ANAR? Net annualized Return? Or, should I be doing the Trailing year XIRR from Statements.

My goal is to figure out what you (Lending Club Pros) would consider to be my actual IRR. Stats are attached.

The first 2 columns (A/B/C) are for ANAR.
The 2nd column set (D/E/F) are Net anualized return - I believe that this is how Peter Renton does it. Yes?
The 3rd column set (H/I/J) are trailing year XIRR from statements.

As you can see, on any column set, my XIRR is going down. Avg months of portfolio 15.6.

Any help is greatly appreciated.

Do you look at it the same way? Is there something else that I should be calculating?

RaymondG

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Re: How should I evaluate my portfolio, help!
« Reply #1 on: May 24, 2016, 12:05:43 PM »
To me, all three calculation are good. I have them all too, though I look at annualized monthly return and Trailing-twelve-month XIRR of both Adjusted Account Value and absolute Account Value more. It's normal for an account to see XIRR dropping toward its mean which depends on your strategy.

Fred93

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Re: How should I evaluate my portfolio, help!
« Reply #2 on: May 24, 2016, 02:56:07 PM »
How old is your account?

During the first 5 months of a loan, it is impossible for a loan to charge-off.  This sometimes causes people with young accounts, and therefore a portfolio of young loans to think they're doing really well at first, and then later say "my return is dropping!"

balto21

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Re: How should I evaluate my portfolio, help!
« Reply #3 on: May 24, 2016, 04:21:16 PM »
How old is your account?

During the first 5 months of a loan, it is impossible for a loan to charge-off.  This sometimes causes people with young accounts, and therefore a portfolio of young loans to think they're doing really well at first, and then later say "my return is dropping!"

to figure out the age of my account?

Started the account in December 2013. Average age of my portfolio is 15.6 months. Any other info needed Fred93?

Not worried about drops but trying to figure out what others use to determine if LendingClub is a good strategy. For example, if I am making 10% per year, then, this is a good thing to do with my Roth. If I am making 7%, maybe I should look elsewhere. (7% and 10% were arbitrary to explain the question)

But, since there are a few numbers that I am tracking, ANAR XIRR, NAR XIRR, Trailing XIRR etc, I am not sure which is the most relevant to determine my success or lack there of.

Based on the 3 equations that I gave, which is the most relevant? Or, is there another equation that would be more relevant to determine my rate of return?

Fred93

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Re: How should I evaluate my portfolio, help!
« Reply #4 on: May 24, 2016, 04:47:59 PM »
Started the account in December 2013. Average age of my portfolio is 15.6 months. Any other info needed Fred93?

Ok, so its a mature account.


Quote
But, since there are a few numbers that I am tracking, ANAR XIRR, NAR XIRR, Trailing XIRR etc, I am not sure which is the most relevant to determine my success or lack there of.

I personally look at ANAR and IRR.  I throw in 3 terms in my IRR calculation which adjust for accrued interest, expected defaults of late loans, and expected defaults of current loans.

I used to be very negative about anything other than IRR, but frankly ANAR has most of the time been a very similar number to my IRR calculation, so I've calmed down about the distinctions.

balto21

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Re: How should I evaluate my portfolio, help!
« Reply #5 on: May 24, 2016, 05:07:17 PM »
Based on what I am reading. my IRR from my ANAR on the spreadsheet that I attached is the best indication as to what I can consider my return on my investment. I am getting my ANAR from LC. Would you accept this to be a good way to get my ANAR? Actually, I am not even sure if that ANAR includes or does not include their fee. hmm. I guess that is another question that I have then.

Anyway, if I am understanding your message, I am making 9.6% on my investment. So, here is my next question...What do you feel is the range that you would expect from this asset class based on it's risks. I understand that I choose my own risk based on the Grades of Loans that I choose, but overall, in unsecured consumer P2P...What is your goal for IRR? At what point would you say...at this X% rate, the risk is not worth the reward.

Thank you,

jheizer

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Re: How should I evaluate my portfolio, help!
« Reply #6 on: May 24, 2016, 06:14:44 PM »
I look at the middle ground between XIRR of the adjusted account value and ANAR.  IIRC ANAR ignores cash drag while XIRR makes it fully in effect.  I only look at things on an adjusted basis since that is my "if I needed money today and sold everything breaking even" return.  Even if in reality you'd probably have to discount some and then still take a 1% selling fee hit.
Replacement to P2P Quant's Percentile Tool http://lc.geekminute.com

Fred93

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Re: How should I evaluate my portfolio, help!
« Reply #7 on: May 24, 2016, 06:41:45 PM »
Anyway, if I am understanding your message, I am making 9.6% on my investment. So, here is my next question...What do you feel is the range that you would expect from this asset class based on it's risks. I understand that I choose my own risk based on the Grades of Loans that I choose, but overall, in unsecured consumer P2P...What is your goal for IRR? At what point would you say...at this X% rate, the risk is not worth the reward.

Different individuals have chosen wildly different filters, so have wildly different portfolios, with wildly different risks.  These portfolios (even when all are designed well) have very different returns.  Therefore, there is no simple one number answer.

I always begin with risk.  I look at the data from the last recession, and see how much defaults on consumer debt went up, and I see how much defaults on LC and Prosper loans went up.  (similar numbers)  I then designed what I hope is a portfolio that has the following property:  If such a recession were to occur again, my return might drop to 0%/year.   Remember my stocks did a whole lot worse than that during each of the last two recessions!  I'm looking for something safer than stocks.

When I designed the best filters I could based on that calculation, I'm able to get between 9% and 10% IRR.  (Have done so for several years, year after year.)  Used to be above 10%, but then rates came down a bit.  Its still above 9%.  I'm very happy with this result.

There is of course no assurance that I've done this design correctly.  The next recession won't be like the last one.  I have tried to be a bit forward looking.  For example, I've filtered out the fracking states, just because recession there is predictable.

If your risk tolerance is similar to mine, then 9% is reasonable.  However, there are people who say they're making 16%.  I believe them, but suspect that their portfolio will lose money in the next big recession.  I don't know when that will come, but I do expect some dip in 2017.  If I could predict recessions, I would invest in the riskiest highest interest rate loans during the good times, and then switch to low risk loans in time for the recession.  Alas, I do not have that ability.

If your risk tolerance is lower, then 5% or 6% may still be a fine return, given the present alternatives, ie 1% or 2% bonds.

balto21

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Re: How should I evaluate my portfolio, help!
« Reply #8 on: May 24, 2016, 09:03:57 PM »
My risk tolerance...hmm. I am in my mid 30s. I thought of LC as a a 30 year play. I wont add more money, but I wanted to let it ride. My goal was 10% IRR which would result in a decent chunk later in life but it does not look like that will happen. I dont have a huge amount compared to many ($18k) but it is not pennies either, especially when looking at my 30 year plan.

All my new loans are C & D and I would consider them to be the best loans of the bunch...stringent filters is a term that I see people use. But who knows. Interesting thoughts on the Fracking. thank you for that.

Would you accept that 5% return for this asset class based on your risk tolerance? Is there a line in the sand or do you compare it to what else is out there? I, like many people in many industries am looking for someone who knows more than me to give me a definitive line in the sand answer such as...if I am making less than 7%, then this is not a good play.

But, I understand that that is not how things work because things are not black and white...there are many factors and everyone has to assess their own risk...but..there is always a but, if you have a line in the sand for yourself, I would be interested in knowing what it is.

AnilG

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Re: How should I evaluate my portfolio, help!
« Reply #9 on: May 24, 2016, 09:57:14 PM »
Anytime you are receiving returns in excess of risk free rate, you are taking extra risk to achieve those excess returns. There is no real free lunch in finance. You need to identify risk with Lending Club and then decide whether you can live with them. There are three major risk categories for an investor with debt oriented marketplace lending.

- Borrower risk,
- Platform risk, and
- Behavioral risk

The recent LC scandal is a good test to identify your behavioral risk tolerance. How worried did you get when the scandal broke, how anxious were you about possibly losing your investment? Did you stop lending? Did you pause lending? This should give you a good measure of your behavioral risk profile. The scandal also highlighted the platform risk. Last couple of years, in discussions whenever I brought up the platform risk, I was always got shot down by statements like "but see these great returns ... yada yada..." Last couple of weeks since scandal some of the same people were freaking out about their investments were not secured by borrower payments. Will you buy a single company corporate junk bond in the same amount as you are lending on LC platform? If not, then you shouldn't be lending that much amount on LC platform either. You are not lending to borrowers, you are investing in the borrower payment linked notes that LC issues, i.e. you are LC's unsecured subordinated creditor.

The borrower risk is not constant, it varies greatly during different phases of credit cycles. Most people try to compare performance of 2008 vintage loans on LC with performance of 2008 stock market which is not appropriate. The 2008 loans didn't completely payoff until 2011. The unsecured consumer loans issued during recession (2008) typically will perform better during the recovery phase (2008+). Recession time borrowers are likely to better credit quality due to stricter credit criteria and lack of credit availability.  The worst performance for unsecured credit are generally for loans that were issued to borrowers during good times or as economy was declining and heading toward recession (2005-2008). When something changes in Borrower capability to make payment, the unsecured credit gets hit first. Talk to some people who ran into credit related issues during 2008, the insights into their decision making process and thinking during different phases from borrowing to losing is very enlightening. I hope this helps you some insights into different risks with these platform and figure out your own risk tolerance. Just don't get blinded by returns and ignore risk.

Marketplace lending is a new alternative asset still in baby phase and hasn't been tested thoroughly yet. Prosper 1.0 and LC scandal are just first couple of hiccups in its path toward maturity. There will be many mores still to come. With 30 year horizon, first you may want to consider looking at Boglehead Investing https://www.bogleheads.org/index.php. Take a look at this article that deconstructs 30 year stock market returns http://awealthofcommonsense.com/2016/05/deconstructing-30-year-stock-market-returns/. With 30 year horizon, I will be looking at mature asset classes like stock market rather than play with a new alternative asset class, beyond a small amount. Use the unsecured consumer lending through LC as diversification play rather than chasing return play.
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balto21

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Re: How should I evaluate my portfolio, help!
« Reply #10 on: May 25, 2016, 09:22:42 AM »
Anytime you are receiving returns in excess of risk free rate, you are taking extra risk to achieve those excess returns. There is no real free lunch in finance. You need to identify risk with Lending Club and then decide whether you can live with them. There are three major risk categories for an investor with debt oriented marketplace lending.

- Borrower risk,
- Platform risk, and
- Behavioral risk

The recent LC scandal is a good test to identify your behavioral risk tolerance. How worried did you get when the scandal broke, how anxious were you about possibly losing your investment? Did you stop lending? Did you pause lending? This should give you a good measure of your behavioral risk profile. The scandal also highlighted the platform risk. Last couple of years, in discussions whenever I brought up the platform risk, I was always got shot down by statements like "but see these great returns ... yada yada..." Last couple of weeks since scandal some of the same people were freaking out about their investments were not secured by borrower payments. Will you buy a single company corporate junk bond in the same amount as you are lending on LC platform? If not, then you shouldn't be lending that much amount on LC platform either. You are not lending to borrowers, you are investing in the borrower payment linked notes that LC issues, i.e. you are LC's unsecured subordinated creditor.

The borrower risk is not constant, it varies greatly during different phases of credit cycles. Most people try to compare performance of 2008 vintage loans on LC with performance of 2008 stock market which is not appropriate. The 2008 loans didn't completely payoff until 2011. The unsecured consumer loans issued during recession (2008) typically will perform better during the recovery phase (2008+). Recession time borrowers are likely to better credit quality due to stricter credit criteria and lack of credit availability.  The worst performance for unsecured credit are generally for loans that were issued to borrowers during good times or as economy was declining and heading toward recession (2005-2008). When something changes in Borrower capability to make payment, the unsecured credit gets hit first. Talk to some people who ran into credit related issues during 2008, the insights into their decision making process and thinking during different phases from borrowing to losing is very enlightening. I hope this helps you some insights into different risks with these platform and figure out your own risk tolerance. Just don't get blinded by returns and ignore risk.

Marketplace lending is a new alternative asset still in baby phase and hasn't been tested thoroughly yet. Prosper 1.0 and LC scandal are just first couple of hiccups in its path toward maturity. There will be many mores still to come. With 30 year horizon, first you may want to consider looking at Boglehead Investing https://www.bogleheads.org/index.php. Take a look at this article that deconstructs 30 year stock market returns http://awealthofcommonsense.com/2016/05/deconstructing-30-year-stock-market-returns/. With 30 year horizon, I will be looking at mature asset classes like stock market rather than play with a new alternative asset class, beyond a small amount. Use the unsecured consumer lending through LC as diversification play rather than chasing return play.

Thank you Anil. You are a wealth of information. I will check out bogleheads but with regards to the market, it actually scares me more than anything. As per A wealth of common sense (your link), yes, over 30 year, returns were around 10% but those times are not like today. (Maybe I am naive in saying that) I think that high frequency trading (and other new tech to analyze market) is a game changer with regards to potential risks and would consider the stock market in the baby phase to where we have not really seen the results of how technology will change the stock market in the future. Thoughts?

One thing that will not change anytime soon people's need to borrow money. So, I actually believe that lending money (at the right interest rate and diversified) is a good long term play. Is unsecured debt the way to go? Is LC the best avenue? You make some great points about the risk of the platform and behavioral risks below.

But to summarize, your opinion, 30 year time span, the market is the way to go. If that is the case, why would anyone choose LC? It is an illiquid investment (unless you play on folio which I cannot since I am Roth) with platform and behavioral risks. DO you think people play in this arena with a 3-5 year outlook? Personally, if I was looking for a 3-5 year play, it would not be LC where your money is either rolling back into it or you can only pull it out in small amounts as interest and principle gets paid.

So, with all of that in mind, based on the platform, behavioral and borrower risks...what do you think is an acceptable XIRR based on all of those risks? If that is not an answer that you want to give with a specific number, that is ok. I understand.

Thank you,


« Last Edit: May 25, 2016, 09:29:59 AM by balto21 »

AnilG

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Re: How should I evaluate my portfolio, help!
« Reply #11 on: May 25, 2016, 01:21:16 PM »
There will always be new developments in the future as there were in past 90 years in the growth of US stock market. We no longer trade stocks in a pit instead electronically. We no longer receive paper stock certificates instead recorded electronically in street name. HFT might have done some bad but also has done some good. I can't imagine paying 5 cent bid-ask spread and different prices for same stock on different exchanges any longer thanks to HFT. P2P Lending is at where stock market was 90 years ago.

People need to borrow money is no different than that of a company's need to borrow money through debt or equity to finance product and services these people may buy using the money you lent. Most research indicates that you reduce your overall portfolio risk by investing in uncorrelated assets not favoring one asset class over another. Both equity/debt public market and private credit market has place in an investor's portfolio. Longer your time horizon and higher your risk tolerance, more you can afford to invest in asset classes with higher expected return and higher short-term variability in returns.

The acceptable return for you is based on your risk appetite and time horizon. There is no one number that fits every one. Some of these may provide you guidelines on what you may expect. Once you decide, come back and tell us what you decided on your expected return and a summary of your risk profile. I am always interested in psych and decision making process of borrowers and lenders. There is no right or wrong answers, that is what makes a market.

Lascott maintains a thread in this forum with actual account returns of residents of Lake Wobegon http://www.lendacademy.com/forum/index.php?topic=3365.0

Lending Club publishes Investor Account Performance with median return of 6.8% https://www.lendingclub.com/info/statistics-performance.action

You can use hurdle rates of the hedge funds investing in P2P Lending as minimum expected return of marketplace lending. For example, as became public recently the LC and its CEO investing in a leveraged fund that had hurdle rate of 4%. Working with institutional funds, I will say most hurdle rates are in same ballpark 4-6%.

Prosper publishes a comparison chart with S&P500 that you can use as a guideline.





Thank you Anil. You are a wealth of information. I will check out bogleheads but with regards to the market, it actually scares me more than anything. As per A wealth of common sense (your link), yes, over 30 year, returns were around 10% but those times are not like today. (Maybe I am naive in saying that) I think that high frequency trading (and other new tech to analyze market) is a game changer with regards to potential risks and would consider the stock market in the baby phase to where we have not really seen the results of how technology will change the stock market in the future. Thoughts?

One thing that will not change anytime soon people's need to borrow money. So, I actually believe that lending money (at the right interest rate and diversified) is a good long term play. Is unsecured debt the way to go? Is LC the best avenue? You make some great points about the risk of the platform and behavioral risks below.

But to summarize, your opinion, 30 year time span, the market is the way to go. If that is the case, why would anyone choose LC? It is an illiquid investment (unless you play on folio which I cannot since I am Roth) with platform and behavioral risks. DO you think people play in this arena with a 3-5 year outlook? Personally, if I was looking for a 3-5 year play, it would not be LC where your money is either rolling back into it or you can only pull it out in small amounts as interest and principle gets paid.

So, with all of that in mind, based on the platform, behavioral and borrower risks...what do you think is an acceptable XIRR based on all of those risks? If that is not an answer that you want to give with a specific number, that is ok. I understand.

Thank you,
---
Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com

balto21

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Re: How should I evaluate my portfolio, help!
« Reply #12 on: May 26, 2016, 02:18:31 PM »
There will always be new developments in the future as there were in past 90 years in the growth of US stock market. We no longer trade stocks in a pit instead electronically. We no longer receive paper stock certificates instead recorded electronically in street name. HFT might have done some bad but also has done some good. I can't imagine paying 5 cent bid-ask spread and different prices for same stock on different exchanges any longer thanks to HFT. P2P Lending is at where stock market was 90 years ago.

People need to borrow money is no different than that of a company's need to borrow money through debt or equity to finance product and services these people may buy using the money you lent. Most research indicates that you reduce your overall portfolio risk by investing in uncorrelated assets not favoring one asset class over another. Both equity/debt public market and private credit market has place in an investor's portfolio. Longer your time horizon and higher your risk tolerance, more you can afford to invest in asset classes with higher expected return and higher short-term variability in returns.

The acceptable return for you is based on your risk appetite and time horizon. There is no one number that fits every one. Some of these may provide you guidelines on what you may expect. Once you decide, come back and tell us what you decided on your expected return and a summary of your risk profile. I am always interested in psych and decision making process of borrowers and lenders. There is no right or wrong answers, that is what makes a market.

Lascott maintains a thread in this forum with actual account returns of residents of Lake Wobegon http://www.lendacademy.com/forum/index.php?topic=3365.0

Lending Club publishes Investor Account Performance with median return of 6.8% https://www.lendingclub.com/info/statistics-performance.action

You can use hurdle rates of the hedge funds investing in P2P Lending as minimum expected return of marketplace lending. For example, as became public recently the LC and its CEO investing in a leveraged fund that had hurdle rate of 4%. Working with institutional funds, I will say most hurdle rates are in same ballpark 4-6%.

Prosper publishes a comparison chart with S&P500 that you can use as a guideline.





Thank you Anil. You are a wealth of information. I will check out bogleheads but with regards to the market, it actually scares me more than anything. As per A wealth of common sense (your link), yes, over 30 year, returns were around 10% but those times are not like today. (Maybe I am naive in saying that) I think that high frequency trading (and other new tech to analyze market) is a game changer with regards to potential risks and would consider the stock market in the baby phase to where we have not really seen the results of how technology will change the stock market in the future. Thoughts?

One thing that will not change anytime soon people's need to borrow money. So, I actually believe that lending money (at the right interest rate and diversified) is a good long term play. Is unsecured debt the way to go? Is LC the best avenue? You make some great points about the risk of the platform and behavioral risks below.

But to summarize, your opinion, 30 year time span, the market is the way to go. If that is the case, why would anyone choose LC? It is an illiquid investment (unless you play on folio which I cannot since I am Roth) with platform and behavioral risks. DO you think people play in this arena with a 3-5 year outlook? Personally, if I was looking for a 3-5 year play, it would not be LC where your money is either rolling back into it or you can only pull it out in small amounts as interest and principle gets paid.

So, with all of that in mind, based on the platform, behavioral and borrower risks...what do you think is an acceptable XIRR based on all of those risks? If that is not an answer that you want to give with a specific number, that is ok. I understand.

Thank you,

Thank you Anil. To answer your question. I am 90% in real estate with a small SFR portfolio. The 10% is cash, LC and a REIT. My goal is to figure out how to place the rest of the cash for a 30 year outlook since it is not enough to buy more real estate.  Right now, my next play is a P2P in real estate who focuses on SFR. After that....maybe the S&P if I see a dip that I like. but I am not an individual stock guy and have read horrible things about mutual funds. So, an ETF or an Index with no or minimal load would probably be my play. And...one day, maybe an SME P2P site.

I love alternative investments. I love what the P2P market brings to the smaller guys such as myself. It may bite me in the arse one day due to it being an immature market and platform/behavioral risks...but this is what I like reading / learning about and having skin in the game makes it more intriguing.

For example, I own 4 bitcoin...not because I think that I will become rich off of it, but I love the concept and owning those 4 give me a vested interest to be excited about it. I just dont have that interest in the "market." for better or worse...

Hurdle rate - I had to google it. Great term and that is a great line in the sand 4-6% that others are using. Thank you so much.