This quarter I only added $600 in new money to my account, which was a far cry from the $3,900 I added in Q4, but I’m pretty close to my target allocation for social lending, so I’ve pretty much stabilized my contributions at this point. As of now, I have 383 notes total in my account, and that’s getting me closer to my target diversification level of 600 notes, but it will still take me all of this year to get there, if not a little longer.
This quarter I moved cities and changed jobs so I had less time to devote to the blog and Lending Club in general. That said, it did push me to try some of the automation services out there – most specifically Lending Robot, which I’m now using to invest almost exclusively for new notes. It’s working well, the main problem seems to be that there is still a very restricted supply of new, high-quality notes out there. I have two rules setup, a primary and secondary, and I almost never find any notes with my primary rule; maybe one every other week.
So, in response, I’ve started putting more money to work on FolioFN to buy into notes, and I have to say I’ll likely put more funds to work through this channel going forward for a few reasons. First, I really like the diversification it gives me in terms of account age, or vintage, and I also like that the notes start paying almost immediately because they are already issued. Waiting for notes to issue and watching them not issue at times can feel like a big waste of time with new notes, and buying existing ones on the secondary market avoids all that.
In terms of losses, I’ve felt a few so far, as you’d have to expect with an account approaching the statistical high water mark for defaults. I had my first note default, a C3 grade for Credit Card Refinancing that even had verified income, so that one stung. It happened to be a note that I selected very early on with Lending Club’s portfolio service, but that met most of my criteria and I would have handpicked it. Beyond that, I have four more notes that are in the last stages of lateness and will almost certainly be charged off. A C5, B4, B3, and B1 – that B1 was really annoying given its high grade.
|Total Invested This Quarter||Total Interest Paid This Quarter||Total Fees Paid This Quarter||Total Charged Off This Quarter||Account Balance at End of Quarter||ROI using XIRR|
As I said in the summary, this quarter I implemented two new strategies – first, automation through Lending Robot, and second, buying current notes through FolioFN to diversify my account into a target age range that avoids the highest point of the default curve. I’ve bought about 40 notes this way and track them in a separate portfolio so I can know when / if one of them hits a grace period or goes late, but I don’t really consider them separate from my core portfolio; rather, I bought them to increase the average age of my account, and hopefully skip some defaults.
When I do buy notes, I’m looking for a few things – first, no premiums on the notes. I don’t need to see a big discount or anything, but I really want to buy at par. Second, I only buy notes that are current and have never had a payment in the grace period. You have to look at the note detail to see this level of information – the Folio service will let you filter notes that are currently in grace period, but not those that have ever been in grace period at some point in their life. Next, I pull up the credit score graph to see if they buyer’s credit is more or less stable – and a lot of times it isn’t. So this is a particularly important element to look at in my opinion because it fluctuates quite a bit note to note. I also look for notes that have a yield of at least 10%, have 24 payments or less to make, are 36 month notes only, were sized at $25 originally, and then exclude notes I’m already invested in.
There aren’t a lot of notes that fit this criteria – out of the 90,000 notes or so for sale, only 10 – 20 will meet this criteria at any given point, and there have been times where I’ve not been able to find a single note. So unfortunately for me, I’m back to putting more time and effort into this platform.
Next quarter I’ll have to continue to live through more defaults, no doubt, and I think I may look into some of the other automated investment services, since LendingRobot is moving to an investment advisor, and will start to charge a management fee on total assets, which for me will end up being pretty expensive vs. what I pay them now since the majority of my account is still notes I hand selected or bought from Folio. I’m not sure why I would pay them a monthly surcharge on those when they didn’t select those notes for me.
I’m actually most worried about being able to reinvest the monthly cashflow on my account, which has now grown to over $330 / month from the $260 it was at at the end of Q4.