Author Topic: I'm thinking of pulling the plug on this experiment  (Read 23059 times)

GS

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I'm thinking of pulling the plug on this experiment
« on: February 11, 2017, 10:03:19 PM »
For the 4 years I've been in LC, I've recorded my Friday account value.  Today, I made a chart of the year over year percent return, and it's really trailing off.  Now below 6% over the last 52 weeks.  I attached the chart.  Anyone else chart their returns, and seeing anything similar?

Fred93

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Re: I'm thinking of pulling the plug on this experiment
« Reply #1 on: February 11, 2017, 10:35:13 PM »
Anyone else chart their returns, and seeing anything similar?

Yep.  Mine is very similar.

LC made a significant shift in underwriting during 2015, which I believe is the cause of much of this change.  The continuing drop in our returns is due to an ever larger fraction of our portfolio originating after these changes.  I suspect it has leveled off.

dr.everett

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Re: I'm thinking of pulling the plug on this experiment
« Reply #2 on: February 11, 2017, 11:19:23 PM »
Same here. I'll have some money coming back from my taxes- used to be I wouldn't think twice about putting it in LC. Now it's probably going to Fundrise or to my stock account. Even thinking about winding my LC accounts down.  :-\

rawraw

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Re: I'm thinking of pulling the plug on this experiment
« Reply #3 on: February 12, 2017, 06:55:41 AM »
Same here. I'll have some money coming back from my taxes- used to be I wouldn't think twice about putting it in LC. Now it's probably going to Fundrise or to my stock account. Even thinking about winding my LC accounts down.  :-\
Why would you move the money to Fundrise or stocks?

GS

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Re: I'm thinking of pulling the plug on this experiment
« Reply #4 on: February 12, 2017, 10:38:10 AM »
I only have about 10% of my retirement savings in LC, but it's underperforming everything.  It is starting to feel like wasted opportunity, plus it's a lot of work.  I log on daily to list late notes, etc..  But it would take me about 4 years to wind the account down naturally ...

Rob L

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Re: I'm thinking of pulling the plug on this experiment
« Reply #5 on: February 12, 2017, 12:22:00 PM »
Don't we have to attribute the drop off in returns to three potential causes?

1) Lowering of interest rates by LC (known cause)
2) Reduction of underwriting standards by LC (suspected cause)
3) Degradation of borrower repayment behavior (strongly suspected cause, most would say known cause)

LC has addressed causes 1 & 2 (at this moment in time), but even if their remedies have completely unwound the historic effects of 1 & 2 we're still left with 3. It seems clear that 3 is substantially worse today than it was before LC began lowering rates years ago. If LC is either unable or unwilling to go even further addressing 1 & 2 (and we have no indication they will) we are left with nothing but "hope" for improvement in 3 going forward to have any expectation of higher returns in the future. Of course that comes with "fear" 3 will continue to degrade (or worse, a recession will come along the way). Bummer...

dr.everett

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Re: I'm thinking of pulling the plug on this experiment
« Reply #6 on: February 12, 2017, 01:42:05 PM »
Same here. I'll have some money coming back from my taxes- used to be I wouldn't think twice about putting it in LC. Now it's probably going to Fundrise or to my stock account. Even thinking about winding my LC accounts down.  :-\
Why would you move the money to Fundrise or stocks?

At the moment I tend to agree with GS and Rob L- in reading on the Fundrise forum a few doors down, they're seeing a consistent 13%, which is where I used to be with LC. I got hit hard by the reduction of underwriting standards by LC, and degradation of borrower repayment behavior as evidenced by the FICO trends on my notes. I've since stopped selling these notes at this time as it seems to be a never ending battle right now that only is losing whatever income was left over after the myriad of defaults, charge offs, and nonpayments that are my LC accounts right now. In doing my taxes, it was very eye opening the amount of money that was going "poof". I had an idea of the amount, but the exact amount was disheartening.

My other reason was my recent call with Investor Services- I got one of the "Hey we haven't talked in a while..." emails, so I took them up on it. The person I spoke to was nice enough, but I didn't feel like I was being listened to- rather I was being talked at- she had a prepared set of talking points for every concern that I had. It felt more like "This is what we've done to address our past faults, let's move on to the next set of talking points."

I think currently I align with what GS posted the most- I've had 30K in charged off notes in my IRA account, and coming up on 10K in my taxable account. That's a lot of wasted money for notes that all started out with FICOs in the 730's or higher. I am very selective about my purchases of Primary notes, and more so with Folio- for it to not be making any difference just make me shake my head and think about how to improve.

rawraw

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Re: I'm thinking of pulling the plug on this experiment
« Reply #7 on: February 12, 2017, 01:58:40 PM »

At the moment I tend to agree with GS and Rob L- in reading on the Fundrise forum a few doors down, they're seeing a consistent 13%, which is where I used to be with LC. I got hit hard by the reduction of underwriting standards by LC, and degradation of borrower repayment behavior as evidenced by the FICO trends on my notes.
This is exactly what I didn't want you to say :(  There are valid reasons to decide to exit LendingClub.  Given the reduction in returns, I reduced my account size  because it went below a rate necessary to avoid paying off some of my student loans.  But this whole trend of "LC returns declined, let's go to Fundrise because they are still high" is probably one of the worst ways to approach this stuff imaginable.  And I'm amazed at how smart people seem to be falling for it.  Since I don't deal with retail investors (I interact with institutional ("sophisicated") investors, I assumed these behaviors were only found in dumb retail people.

Fundrise has returns of 13%.  Great.  What will their returns look like when the weakness in their underwriting shows up?  Will it be 8%?  6?  Will it be -20%?  In finance, you hear people talk about mean reversion.  Things that do poorly tend to do better and things that do better tend to do poorly.  There is a mean which things tend to approach.  And the problem with investors in equity markets (where all the research has been done) is they chase returns and end up buying high and selling low. 

I really wish I could convince at least one person on this forum to stop chasing returns, because that is just increasing the risk of having huge very poor performance.  I was telling people this a couple years ago when they were just investing in the highest grades possible and now that the strategy has gone sour, many people seem to just use the same process to find a different investment.

The important thing in all this is process, not outcome.  I'm perfectly fine with someone having a defensible process that shows Fundrise is a better choice.  But I'm not seeing any of that.  It is just "Oh, well LC is doing poorly so let's go to Fundrise."  If we think about mean reversion, don't you want to be making new loans on a platform that has realized the risk of expanding the credit box and been penalized for it?  This isn't even discussed.  Instead the conversation is  today's returns are lower, so I'm out.

You guys can do what you want.  But this forum has always made me worried.  I worry the ability for retail people like myself to invest in these loans is going to get regulated away because people do not know how to think about credit, but they are making all the mistakes lenders learn very early on not to do.  This "process" of chasing the highest returns would have had you investing in subprime in 2006 and losing almost your entire investment. 

It is never clear what the next "subprime" is, although it'll seem obvious in hindsight.  But I put the real estate C&D lending I've seen in peer lenders at the top of my list of things that could blow up in a major way next crisis.  I'm not very concerned with LendingClub prime borrowers.

Anyway, I'm probably going to give up this fight because I feel like a broken record.  I just hope it works out for you guys

dr.everett

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Re: I'm thinking of pulling the plug on this experiment
« Reply #8 on: February 12, 2017, 02:43:38 PM »

At the moment I tend to agree with GS and Rob L- in reading on the Fundrise forum a few doors down, they're seeing a consistent 13%, which is where I used to be with LC. I got hit hard by the reduction of underwriting standards by LC, and degradation of borrower repayment behavior as evidenced by the FICO trends on my notes.
This is exactly what I didn't want you to say :(  There are valid reasons to decide to exit LendingClub.  Given the reduction in returns, I reduced my account size  because it went below a rate necessary to avoid paying off some of my student loans.  But this whole trend of "LC returns declined, let's go to Fundrise because they are still high" is probably one of the worst ways to approach this stuff imaginable.  And I'm amazed at how smart people seem to be falling for it.  Since I don't deal with retail investors (I interact with institutional ("sophisicated") investors, I assumed these behaviors were only found in dumb retail people.

Fundrise has returns of 13%.  Great.  What will their returns look like when the weakness in their underwriting shows up?  Will it be 8%?  6?  Will it be -20%?  In finance, you hear people talk about mean reversion.  Things that do poorly tend to do better and things that do better tend to do poorly.  There is a mean which things tend to approach.  And the problem with investors in equity markets (where all the research has been done) is they chase returns and end up buying high and selling low. 

I really wish I could convince at least one person on this forum to stop chasing returns, because that is just increasing the risk of having huge very poor performance.  I was telling people this a couple years ago when they were just investing in the highest grades possible and now that the strategy has gone sour, many people seem to just use the same process to find a different investment.

The important thing in all this is process, not outcome.  I'm perfectly fine with someone having a defensible process that shows Fundrise is a better choice.  But I'm not seeing any of that.  It is just "Oh, well LC is doing poorly so let's go to Fundrise."  If we think about mean reversion, don't you want to be making new loans on a platform that has realized the risk of expanding the credit box and been penalized for it?  This isn't even discussed.  Instead the conversation is  today's returns are lower, so I'm out.

You guys can do what you want.  But this forum has always made me worried.  I worry the ability for retail people like myself to invest in these loans is going to get regulated away because people do not know how to think about credit, but they are making all the mistakes lenders learn very early on not to do.  This "process" of chasing the highest returns would have had you investing in subprime in 2006 and losing almost your entire investment. 

It is never clear what the next "subprime" is, although it'll seem obvious in hindsight.  But I put the real estate C&D lending I've seen in peer lenders at the top of my list of things that could blow up in a major way next crisis.  I'm not very concerned with LendingClub prime borrowers.

Anyway, I'm probably going to give up this fight because I feel like a broken record.  I just hope it works out for you guys

I do appreciate the input, and that's why I post in places like this- to get the viewpoints that I don't have from others, and to learn from them. Please don't give up.

I've always believed in diversification- that's why I have LC accounts, stock accounts, and now a Fundrise account. I'm old enough now that in a dozen or so years I would like to be able to retire early and enjoy whatever time I may have left. 2-3 years ago if someone said to me here's 10-20K to invest, where would you put it, I would have said LC hands down. Now, not so much. The stock account as of late has been doing well, I'm dabbling in dividend stocks and liking what I see based on the small amounts invested. Just looking at my overall investing strategy to see what tweaks I want to make to get to that early retirement goal. Likely some of that money will go in the Roth, some in the stock account, and the remainder to FR. I do make a small monthly deposit to my LC Taxable account, but that may be in question going forward.

I think for me Fundrise right now has the same place that LC did at first- skeptical until it proves itself. That said I'm going to give them a chunk of money and see what happens. If they do well, they'll get more. In being diversified I have choices to make to decide where I want to put the money to work. Given the LC returns as of late I'm strongly leaning towards Fundrise and my dividend stocks. You may be right that I am chasing returns on LC and the stocks- my goal is to get a recurring revenue stream that could handle the early retirement until real retirement kicks in. While not there yet- it is in sight.

Back to the original post- LC is on watch- If I see that other investments are doing well, I will do as you did and reduce my investment there and funnel them elsewhere so I can get to my end goal.

Fred93

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Re: I'm thinking of pulling the plug on this experiment
« Reply #9 on: February 12, 2017, 04:29:09 PM »
I only have about 10% of my retirement savings in LC, but it's underperforming everything.  It is starting to feel like wasted opportunity,

Uh... The stock market has shot up recently, but it won't continue.  Likewise, other things may look better for short periods.  Doesn't mean LC is not a good thing.  Think diversification.

Quote
plus it's a lot of work.  I log on daily to list late notes, etc..  But it would take me about 4 years to wind the account down naturally ...

You can automate, and thereby remove that workload.

Fred93

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Re: I'm thinking of pulling the plug on this experiment
« Reply #10 on: February 12, 2017, 04:31:32 PM »
Don't we have to attribute the drop off in returns to three potential causes?

1) Lowering of interest rates by LC (known cause)
2) Reduction of underwriting standards by LC (suspected cause)
3) Degradation of borrower repayment behavior (strongly suspected cause, most would say known cause)

LC has addressed causes 1 & 2 (at this moment in time), but even if their remedies have completely unwound the historic effects of 1 & 2 we're still left with 3. It seems clear that 3 is substantially worse today than it was before LC began lowering rates years ago.

And where is your evidence for #3?  The federal reserve statistics still show consumer lending delinquency rates and charge-off rates about the best ever.

Quote
If LC is either unable or unwilling to go even further addressing 1 & 2 (and we have no indication they will) we are left with nothing but "hope" for improvement in 3 going forward to have any expectation of higher returns in the future.

And what if we have no "hope for higher returns" ???  We have about 6% !  That's actually pretty good.  It ain't like yesterday,  but that's true of many things my friend.

michael49

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Re: I'm thinking of pulling the plug on this experiment
« Reply #11 on: February 12, 2017, 05:13:46 PM »
I'm continuing with LC for now, but I haven't invested any new funds for over a year now - I'm just re-investing at this point.  I've seen both my taxable and IRA accts both take a big hit over the past year.  I am investing much more conservatively as of late, mostly A, B and C loans.

AnilG

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Re: I'm thinking of pulling the plug on this experiment
« Reply #12 on: February 12, 2017, 05:48:48 PM »
Chasing return is never a recipe for success with your investment portfolio. You will always be behind the curve and chasing high fliers of today to be disappointed tomorrow. History is full of such examples. If you solely got into Lending Club because of high return, you might be better off re-evaluating your whole investment philosophy and whether you have the mindset to be an investor instead of a trend-chaser.

I got into Lending Club and Prosper from diversification perspective and for direct access to an asset class (consumer lending) that is not typically available to retail investors. Once I reached the level of exposure I wanted to this asset class in 2014, I stopped adding any new funds to the accounts. Since then I stop reinvesting and withdraw cash when account levels get too far ahead of my desired allocation.

I echo the cautious approach of rawraw when considering other alternative lending options. You need to consider, beyond returns, what is different about these other new options, what do you know about the sectors these options are involved in, and why could you do better with these newish options versus tried and true options in same sector, if any.
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Rob L

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Re: I'm thinking of pulling the plug on this experiment
« Reply #13 on: February 12, 2017, 05:52:30 PM »
And where is your evidence for #3?
The federal reserve statistics still show consumer lending delinquency rates and charge-off rates about the best ever.

I'll defer to rawraw on that one (from his post on the "suffer fools gladly thread).





http://www.valuewalk.com/2016/06/consumer-nonperforming-loans-soar/

For that matter, I could defer to you and your excellent chart that definitively shows delinquencies at an all time high.
Methinks this is something of a devils advocate question you are asking (which is often a good thing to promote discussion).



And what if we have no "hope for higher returns" ???  We have about 6% !  That's actually pretty good.  It ain't like yesterday,  but that's true of many things my friend.

Well, beauty is in the eye of the beholder.

Fred93

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Re: I'm thinking of pulling the plug on this experiment
« Reply #14 on: February 12, 2017, 06:23:00 PM »
And where is your evidence for #3?
The federal reserve statistics still show consumer lending delinquency rates and charge-off rates about the best ever.

...I could defer to you and your excellent chart that definitively shows delinquencies at an all time high.
Methinks this is something of a devils advocate question you are asking (which is often a good thing to promote discussion).

Here's the deal about that...  When trying to determine whether the increase in LC delinquency rates is due to "the consumer" or due to LC's underwriting practices (ie how they've changed), one needs to look at data which includes one but not the other.

The LC delinquency by vintage shows recent vintages behave worse than past vintages, but you can't decide whether that is due to the consumer or due to LC until you look at some data which includes one but not the other.

When you look at the Federal Reserve's consumer loan stats, they continue to be just about the best ever.  Taken at face value, this would tend to put the blame on LC, not the consumer.

Yes, I know some have argued (nonattender) that perhaps the fed's stats represent a broader segment of consumers than the segment LC lends to, so maybe this isn't the best data series to use for comparison.  Perhaps.

In any case, I will stick by my guns on the concept that you can't make judgements about "consumer behavior" by looking at LC's loan data in isolation.  You can fool yourself, because the same degradation vs time could be a result of changes in underwriting at LC without any change at all in consumer behavior.