Author Topic: I'm thinking of pulling the plug on this experiment  (Read 23060 times)

JohnnyP

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Re: I'm thinking of pulling the plug on this experiment
« Reply #45 on: February 17, 2017, 10:30:41 PM »
"And the downside?  It is very measurable, we have lots of data on it.  Just depends on the risk you put in the portfolio.  I stress test my portfolio to quantify my downside.  This is required in any sound process to evaluate LC IMO."

OK, I need to ask. What is all this downside data? How do you do a stress test?




rawraw

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Re: I'm thinking of pulling the plug on this experiment
« Reply #46 on: February 18, 2017, 12:47:47 AM »
"And the downside?  It is very measurable, we have lots of data on it.  Just depends on the risk you put in the portfolio.  I stress test my portfolio to quantify my downside.  This is required in any sound process to evaluate LC IMO."

OK, I need to ask. What is all this downside data? How do you do a stress test?
Depends how complex you want to get.  We have various bank data proxies from the Federal Reserve we can use, like losses on credit card consumer loans over time. We also have the LC early performance, which was during the recession. And then you can get data from credit agencies and others for various risks from products.

I've done it a couple ways. One  I took the losses experienced by LC by grade from the crisis and applied it to my own portfolio. This reflects  risk based on composition. I made some adjustments to increase the severity for the losses on 60 month loans.

Another way is I take the credit card net charge off data from various recessions from FRED and apply it to the portfolio. This ignores the difference in credit quality.

And then I also do stress tests, where I just assume loss rates increase at given intervals to see how robust my portfolio is. I use the LC loss curves for this

This isn't meant to say I can predict what my losses will be. But I have a fairly good idea what bad could look like. I did this a few years ago when everyone here was investing in high grade notes and my returns were below everyone. The exercises helped me decide I didn't think it was worth the risk to change my composition that much

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jasondhsd

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Re: I'm thinking of pulling the plug on this experiment
« Reply #47 on: February 18, 2017, 01:18:36 AM »
I get it, it's emotional, however I do feel very similarly to the OP here. When we are in a strong and growing economy, and consumer defaults (overall) are at very low levels, is 6% really the new expectation that you are comfortable with?

We're not talking about 6% being the long term average. We're talking about 6% being the average when conditions are not only strong, but not likely to significantly improve. What is going to happen when these conditions deteriorate? We're starting to cut profits pretty thin in a market with already arguable liquidity (selling at a significant loss in folio doesn't make it liquid IMO), and I'm not interested in taking a bath here.

If the best upside is 6% (+~2% for you master pickers), and the downside is yet to be seen(but most likely not pretty), what is it that you are hoping for here? Not trying to be inciting, just genuinely curious.

Yup I feel pretty much the same way.  Started out pretty well 9%-10% but it's slowly been sliding the past 4 months now below 5% and I just checked dropped even further to 4.44%. Now to be fair I don't think Lendingclub ever advertised that they were competing with returns from the market but from returns of a CD or savings account 'earn 5x more than savings' etc.  My issue is that with over 1000 loans spread out across various interest rates I think I  should be doing better than almost 9% charge-off rate.  With as many loans as I have I should be feeling relatively safe, maybe not quite 1% money market or savings account safe but fairly safe nonetheless. Now I've lost complete confidence that the money will earn more than what I would of gotten in a savings account the way my ANNR is dropping and I'm very worried that I'll lose some principal too.

rawraw

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Re: I'm thinking of pulling the plug on this experiment
« Reply #48 on: February 18, 2017, 01:35:17 AM »
I get it, it's emotional, however I do feel very similarly to the OP here. When we are in a strong and growing economy, and consumer defaults (overall) are at very low levels, is 6% really the new expectation that you are comfortable with?

We're not talking about 6% being the long term average. We're talking about 6% being the average when conditions are not only strong, but not likely to significantly improve. What is going to happen when these conditions deteriorate? We're starting to cut profits pretty thin in a market with already arguable liquidity (selling at a significant loss in folio doesn't make it liquid IMO), and I'm not interested in taking a bath here.

If the best upside is 6% (+~2% for you master pickers), and the downside is yet to be seen(but most likely not pretty), what is it that you are hoping for here? Not trying to be inciting, just genuinely curious.

Yup I feel pretty much the same way.  Started out pretty well 9%-10% but it's slowly been sliding the past 4 months now below 5% and I just checked dropped even further to 4.44%. Now to be fair I don't think Lendingclub ever advertised that they were competing with returns from the market but from returns of a CD or savings account 'earn 5x more than savings' etc.  My issue is that with over 1000 loans spread out across various interest rates I think I  should be doing better than almost 9% charge-off rate.  With as many loans as I have I should be feeling relatively safe, maybe not quite 1% money market or savings account safe but fairly safe nonetheless. Now I've lost complete confidence that the money will earn more than what I would of gotten in a savings account the way my ANNR is dropping and I'm very worried that I'll lose some principal too.
You take no responsibility for the loans you chose to invest in?

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jasondhsd

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Re: I'm thinking of pulling the plug on this experiment
« Reply #49 on: February 18, 2017, 10:01:21 AM »
Nope.  I used automatic investment and trusted in the platform when it said it I invest in at least 100 notes 99% change I'll have low volitity and good returns. With 1000+ that should be virtually 100% chance.  I set filters for high credit score, home owner or mortgage, at least 2yrs of employment, no more then 20 open lines of credit, debt to income ratio of 35% and a few others. It's not like we have the borrowers personal information to check on them ourselves and besides who had time that. Also I think LC gives up to easily in their collection effort.

rawraw

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Re: I'm thinking of pulling the plug on this experiment
« Reply #50 on: February 18, 2017, 10:11:59 AM »
Nope.  I used automatic investment and trusted in the platform when it said it I invest in at least 100 notes 99% change I'll have low volitity and good returns. With 1000+ that should be virtually 100% chance.  I set filters for high credit score, home owner or mortgage, at least 2yrs of employment, no more then 20 open lines of credit, debt to income ratio of 35% and a few others. It's not like we have the borrowers personal information to check on them ourselves and besides who had time that. Also I think LC gives up to easily in their collection effort.
Does your mix of loans by grade match the mix of LendingClubs originations over the past year or so? This is roughly 70 percent in A, B, and, C.

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jasondhsd

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Re: I'm thinking of pulling the plug on this experiment
« Reply #51 on: February 19, 2017, 12:26:43 AM »
My allocation currently is A: 5, B: 14% C: 26% D: 33% E: 11% F: 5% G: 3% cash 3%  I believe I selected D-G weighted since that was suppose to give the best returns but then I manually adjusted it to give myself a bit more weight towards A and B (think D-G weighted had A B at 1%.

rawraw

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Re: I'm thinking of pulling the plug on this experiment
« Reply #52 on: February 19, 2017, 03:02:18 AM »
My allocation currently is A: 5, B: 14% C: 26% D: 33% E: 11% F: 5% G: 3% cash 3%  I believe I selected D-G weighted since that was suppose to give the best returns but then I manually adjusted it to give myself a bit more weight towards A and B (think D-G weighted had A B at 1%.
In finance, this would be called going overweight riskier notes and underweight lower risk notes. This would mean your returns were designed to differ from those of the platform as a whole. The high  charge off rate reflects this decision to allocate that way.  I guess my point is that while maybe we can be  upset in finding that potential return is not the same as guaranteed return, many of us make decisions that alters the returns. The whole reason something is higher return is because it also has a higher chance of differing from the expectation.

dr.everett

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Re: I'm thinking of pulling the plug on this experiment
« Reply #53 on: February 25, 2017, 03:00:03 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.

Following up on this after thinking about it a lot for the last few weeks- I've made the decision to do like others and stop actively investing in LC- starting with what I'll get back on my tax returns in a few weeks, and continuing with the monthly deposits I was making to LC. My other post about being surveyed and the call I had with Investor Services prior to that put the nails in the coffin so to speak.

I'll continue to reinvest payments that come in, but until I see improvements, no new money. I'm going to give Fundrise the new money, and split the return money between my ROTH IRA for this year's contribution, and the remainder to go into some dividend stocks I've been eyeing for a while. I'll see how Fundrise does over the coming year, if LC improves, what the stocks do, and if Lending Robot's predictions about my expected returns materialize. (13.8 and 14.2% for LR managed notes- not seeing that yet)

I haven't arrived at this decision lightly- and I want to thank rawraw, Anil, Fred(s) and others for your thoughts- it has helped me weigh my actions and I think arrive at an informed decision. So not getting out of Lending Club as I had originally thought about, instead looking at investments with less loss than LC currently has. I'm hoping LC returns to what it did when I first started with them, when they do, I'll be back.