Lend Academy Network Forum

Lending Club Discussion => Investors - LC => Topic started by: ktrdsl23 on February 25, 2015, 08:13:04 AM

Title: Diversification question - Too many notes?
Post by: ktrdsl23 on February 25, 2015, 08:13:04 AM
I am just getting started with Lending Club and have been reading up on many topics.  I of course have seen and understand the importance of diversification.  Is there too much of a good thing though if I'm planning to invest a larger sum of money at LC and Prosper?  For now I'll probably invest between $30-50k at each site.  If I stick with the base $25/loan that could mean as many as 2000 notes at both sites.  I could easily bump up my amount per loan from $25 to perhaps $200 but I'm not sure if I should or not.  It appears that there are many loans available at each site with new ones constantly coming in so I don't think it would take too long to fill an order of $50k even with just a $25/note. 

So I guess my question is at some point does it start negatively impacting returns if you diversify across 1,000, 2,000 or even 5,000 loans?  Or does it simply become an issue of being able to get the orders filled?

Thanks.
Title: Re: Diversification question - Too many notes?
Post by: kya on February 25, 2015, 08:46:02 AM
i would go to $50 a note if you plan on investing 25k.... its harder than you think to keep deploying all the cash!... listings constantly cancel, notes get paid off in 30-60 days time etc... not to mention if you do even modest filtering loan choices esp on prosper become somewhat limited. 500 notes in my humble opinion is enough but if you feel safer by only investing 25.00 per note go for it but you will be spending a bunch of time to get cash deployed... i added 5k on jan 1 to both my prosper and lc accounts and still dont have all my cash deployed.... good luck!
Title: Re: Diversification question - Too many notes?
Post by: lascott on February 25, 2015, 09:43:13 AM
So I guess my question is at some point does it start negatively impacting returns if you diversify across 1,000, 2,000 or even 5,000 loans?  Or does it simply become an issue of being able to get the orders filled? Thanks.
Exercising patience is a good thing in P2P as I've learned in the past year.  You'd realize the impact of investing larger $ amounts in each note as soon as one defaults/charge_offs. You'll see your [Adjusted Net Annualized Return drop pretty quickly when defaults/chargeoffs happen.]

There are statisticians and quants on this forum as well as long timers and sometimes the abbreviate as if they are talking to colleagues or other long timers. They'll use terms like CI instead of confidence intervals which makes it harder to search for things.  I get it as I have done the same in some other forums.  Here is a good set of related post on CI and diversification. Personally I'm doing $50 but started several months at $25. My 60 month notes are still at $25.

http://www.lendacademy.com/forum/index.php?topic=2637.msg23110#msg23110
Title: Re: Diversification question - Too many notes?
Post by: ktrdsl23 on February 25, 2015, 10:01:17 AM
So I guess my question is at some point does it start negatively impacting returns if you diversify across 1,000, 2,000 or even 5,000 loans?  Or does it simply become an issue of being able to get the orders filled? Thanks.
Exercising patience is a good thing in P2P as I've learned in the past year.  You'd realize the impact of investing larger $ amounts in each note as soon as one defaults/charge_offs. You'll see your

There are statisticians and quants on this forum as well as long timers and sometimes the abbreviate as if they are talking to colleagues or other long timers. They'll use terms like CI instead of confidence intervals which makes it harder to search for things.  I get it as I have done the same in some other forums.  Here is a good set of related post on CI and diversification. Personally I'm doing $50 but started several months at $25. My 60 month notes are still at $25.

http://www.lendacademy.com/forum/index.php?topic=2637.msg23110#msg23110

Thanks for the link.  It seems quite interesting and I want to focus on some of the findings a bit more.  I decided to start with $50/note and will probably keep it here although if I decide to invest more I may bump it up to $75 or $100/note after I pass 1-3,000 notes. 

The other issue I just started reading about is the differential treatment for tax purposes of interest and charge offs.  With the $3k/year limit for using charge-offs against income it might eventually be a hindrance to really letting my account grow.  I should have enough in dividends and capital gains to offset the charge-offs that I'm not going to worry about it for now and will see how it all plays out when I get my 1099 next year. 
Title: Diversification question - Too many notes?
Post by: BruiserB on February 25, 2015, 10:51:19 AM
I have done $50-$75 in notes when I'm trying to deploy a new investment into LC, but once I'm fully invested, I back off to $25 when I'm just reinvesting my incoming payments.  My rules seem to find just enough notes to keep me in balance.


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Title: Re: Diversification question - Too many notes?
Post by: rawraw on February 25, 2015, 10:51:53 AM
As the numbers of notes increase, the volatility of returns decreases.  The only real negative impact to your returns is that when you get so diversified, you represent a market portfolio eliminating the ability for 'alpha', or better than market returns.  The size of notes shouldn't impact the amount of charge offs each year, unless u aren't investing the same amount per note. 
Title: Re: Diversification question - Too many notes?
Post by: lascott on February 25, 2015, 12:16:23 PM
The size of notes shouldn't impact the amount of charge offs each year, unless u aren't investing the same amount per note.
To your point of when you have so many notes is that the statistical probably of 2 $25 notes defaulting is similar to 1 $50 note defaulting.  ie. accounts with 2000 $25 notes vs 1000 $50 notes.  Doesn't seem to be the exact same but that, I believe, was part of the CI conversation I linked to.
Title: Re: Diversification question - Too many notes?
Post by: ktrdsl23 on February 25, 2015, 02:21:48 PM
Thanks for the responses and especially to lascott for the link posted.  After reading through I discovered the biggest risk I was not aware of and that is LC's lack of a BRV and what it would mean if LC eventually went bankrupt.  My plans had been to gradually bring more and more money over to LC (and Prosper) and depending on where interest rates go over the next couple of years could have seen myself with 250-500k or more invested in P2P. 

I'm not so sure anymore that I feel comfortable if hearing that my loans to LC could be wholly lost based on the health of LC itself.  I might investigate the whole institutional side of LC to get the protection but am certainly not at the point where I'd consider investing those types of sums anytime soon.  I also don't quite feel as comfortable at Propser yet as compared to LC so the presence of a BRV doesn't remove the issue for me over at Prosper.

Anyway thanks again as this is certainly information I'm glad to have now and not after I had already invested far more than I would feel comfortable knowing this new nugget of information.  Hopefully LC will soon offer the benefits of a BRV so that issue can be removed from the equation.
Title: Re: Diversification question - Too many notes?
Post by: rawraw on February 25, 2015, 02:46:57 PM
I seriously doubt BRV is on LC's radar.  They made 'adjusted' profits this quarter.
Title: Re: Diversification question - Too many notes?
Post by: storm on February 25, 2015, 07:29:38 PM
If you are planning on using the trading platform, $25 notes are easiest to liquidize.  I'm not sure you can be too diversified, but I have over 3200 notes, and it is confusing and time consuming to keep track of them.
Title: Re: Diversification question - Too many notes?
Post by: rawraw on February 26, 2015, 06:42:04 AM
If you are planning on using the trading platform, $25 notes are easiest to liquidize.  I'm not sure you can be too diversified, but I have over 3200 notes, and it is confusing and time consuming to keep track of them.
If you look at the diversification curve, at a certain point you get diminishing impact for each additional step towards more diversification.  If you feel everything is 100% correctly priced, or don't care about thinking about it, more isn't going to be bad.  But it does have an impact, including the potential to earn above and below the market return.  Otherwise your return is purely based on 'beta'
Title: Re: Diversification question - Too many notes?
Post by: Galli on March 06, 2015, 01:32:37 PM
If you are planning on using the trading platform, $25 notes are easiest to liquidize.  I'm not sure you can be too diversified, but I have over 3200 notes, and it is confusing and time consuming to keep track of them.
If you look at the diversification curve, at a certain point you get diminishing impact for each additional step towards more diversification.  If you feel everything is 100% correctly priced, or don't care about thinking about it, more isn't going to be bad.  But it does have an impact, including the potential to earn above and below the market return.  Otherwise your return is purely based on 'beta'
There's a subtle, but important, difference between diversification of $'s/note and diversification across a specific criteria of notes within a class.  By allocating more of your investment over the same 'class' of notes you're decreasing idiosyncratic risk but increasing your risk to specific class of notes.  Diversification in this type of investment is just as critical as choosing the right criteria.  Diversification across a good criteria set can earn returns in excess of what is expected for that specific note 'class'.

It's unreasonable to think that simply investing in less notes generates alpha and academically is inconsistent with modern portfolio theory which states that excess returns is most likely a simple function of increasing ones risk. If you adjusted the return for risk you would probably see it likely representing the market return.



Title: Re: Diversification question - Too many notes?
Post by: avid investor on March 09, 2015, 10:43:06 AM
I would agree with $50 given the amount you intend to invest.  Between my wife and I, we have 4 LC accounts (2 IRAs), and have significantly more invested.  I have moved up for some time now to $75 for the largest account.

I think you have to consider time required to invest such large amounts, too.  If you invest in $25 notes and it takes you 3 months to get it all invested, then you have had several months with no return on a significant portion of your money.  You could always invest at $50 to get it all invested, and then re-adjust to $25 if you find that the amount of (principle + interest)  money that you receive is manageable at that level and that you are finding enough notes to keep close to fully-invested.

Keep in mind that you will always have sideline cash.  I define that as money that hasn't been invested + money that has been invested in unapproved notes.  A significant portion of that latter bucket will come back to when loans are not approved.

My accounts run between 2.6% and 3.5% sideline cash at all times, and I use the API and automatically fund loans 6 times per day.  (Thanks for the off-hours tip, Fred.) 
Title: Re: Diversification question - Too many notes?
Post by: BayouBill on March 21, 2015, 09:33:43 PM
I think a lot of LC investors forget the principle of liquidity.  I try to invest only in $25 notes even in the same note.  Most new LC investors are told to diversify in at least 200 notes to mitigate risk.  Therefore, the market for $25 notes should be higher than larger denominations.

I have had some concern about liquidating large number of notes.  I have sold some of my notes which takes on average 3 to 5 days but some notes take 7 to 10 days. 

I would like to invest much more but I am concern about about liquidity in cases of emergency.  What do you say?
Title: Re: Diversification question - Too many notes?
Post by: lascott on March 21, 2015, 10:54:14 PM
I would like to invest much more but I am concern about about liquidity in cases of emergency.  What do you say?
If liquidity is that important then put your money elsewhere.
Title: Re: Diversification question - Too many notes?
Post by: BruiserB on March 23, 2015, 11:44:48 AM
I would like to invest much more but I am concern about about liquidity in cases of emergency.  What do you say?
If liquidity is that important then put your money elsewhere.

I do think BayouBill makes a good point though.  I know the liquidity risk with LendingClub and have put in money that I don't anticipate needing quickly.  However, if I did need to get cash out, I'd much rather sell off $25 notes than $200 notes as I think there would be a lot more investors willing to buy the smaller loans.  So even if I wanted to invest $200 in a loan, I'd rather buy 8 $25 notes than 1 $200 note.  Even though I don't plan to liquidate my investment, I'd prefer to make it in a way that would allow it to be most easily liquidated in case of need.
Title: Re: Diversification question - Too many notes?
Post by: racist on April 06, 2015, 11:57:44 PM
There is no problem to invest 25/note, if you use API.

I have most notes 25-100 with 500k+ bankroll, it does not take so long if doing on auto. But if you have to do it manually I would stick with much higher notes. Not only that time is money, but it is also quite difficult to get the right loans with bare hands.