Lending Club over Prosper

I opened accounts with both Prosper and Lending Club peer to peer (P2P) sites about two months ago. These are regular accounts meaning the interest earned is taxable. I also bought and sold some notes and presumably there will be capital gains or losses to report. I was interested in knowing what type of tax documents I would receive.

My long term interest was in having this type of investment in a rollover IRA to avoid the tax issues. But since I was inclined to recommend P2P to my friends and family I wanted to understand how they worked and the the tax implications.

It also gave me a chance to evaluate the two choices and determine where my IRA would be opened. I started with Prosper and got off to a bad start. The process took longer than expected. Prosper’s response to questions usually took several days.  Lending Club’s responses have been timelier.

I also found that I liked Lending Club’s web site more than Prosper’s.  I really can’t quantify the differences. Lending Club offered some download options that I liked. My long term plan involves owning about a thousand notes. Downloading data would be important if one wants to manage and analyze your portfolio.

I suppose one could just use the automatic investment plans provided and not even worry about following individual notes. Realistically this is what we’ll likely do.

When payments were made on Prosper notes, my account was not updated for six to ten days after the payment date. Meanwhile, Lending Club payments were posted to my account five days after the payments were made. In both cases, the recorded payment date was the payment due date. They may have been paid earlier.

Trades settled quicker on Lending Club than on Prosper. I offered 3 notes for sale. Two were sold the next day and the money was immediately in my account.  The other sold 3 days later.  I offered 10 notes on Prosper, 5 at fixed price and 5 at auction (Lending Club did not offer this option). There were no offers on the auction notes. When the Prosper notes sold, they did not settle for a week.

Lending Club is the bigger of the two. This means more notes to choose from. Finally, Lending Club is now a public company so will  be more likely to be around.

All of this added up to selecting Lending Club as the P2P vendor I will use. I have opened a Lending Club IRA. I have emptied the Prosper account and am in the process of closing it.

I will follow up with the tax reporting in a few weeks. Follow me on Twitter @billlanke to be notified when I add new posts.

Test Accounts Week 2

The S&P 500 index was up about 1.6% last week. The 2 automated investing service’s test accounts, Betterment and Wealthfront, had up weeks, but lower than the S&P 500 index. They hold a mixture of stocks and bonds. The bond components should result in under performing the S&P 500 index in up weeks and over performing in down weeks. In the past week, they gained 1.1% and 0.7% respectively.

The next learning event for these 2 will be when dividends are received for the ETFs they hold. These will be reinvested. It will be interesting to see how and when this is done.

The Folio Investing account had a better week, gaining almost 2% last week. This account is almost entirely invested in stocks.

As mentioned in the previous post, Automated Investing was turned on for Lending Club. In the initial round of funding, they invested in 117 notes at $25 each. Over the next 3 days, they invested 13 separate times in from 1 to 9 notes on each occasion. I set the initial limit at $4900 and we are approaching that. My account holds 192 notes, but none have been issued yet. They are in various stages of funding and review.

Nothing will be earned in the Lending Club accounts until one month after notes are issued and payments begin. So the account value will remain at $10,000 for a while.

Lending Club Update

Finally the Lending Club IRA has been funded. It only took 24 days. I started the process by applying to Lending Club. They passed the ball to Self Directed IRA Services (SDIRA). Then it was on to TIAA/CREF for the rollover. TIAA/CREF passed it back to me, and after I submitted the proper paperwork, deposited a check in the USPS. Finally the check was received and deposited by SDIRA. Then they sent the funds to Lending Club.  You can see the time line below.

OK, there were 5 entities involved, 3 weekends, and 2 holidays. But I will admit being disappointed with all of the participants.  Contrast this to setting up the Betterment account, about 48 hours from application to funds invested.

But now on to managing the Lending Club account. I started the ball rolling by bidding on 4 notes. Since I ultimately expect to hold about 400, $25 notes, I decided to try automated investing. With this option you specify some selection criteria and Lending Club will search four times a day for appropriate notes. There are 7 grades of notes and I elected to allocate 7% of my funds to each. This will leave 51% of my cash for manual selections. I elected to limit investment in each note to $25 each.. Finally I accepted either 36 or 60 month notes. I will follow-up with how quickly notes are purchased.

Date    Action

12/29   Applied for Lending Club IRA

12/31   Welcome letter from SDIRA

01/06   Notified TIAA/CREF rejected transfer

01/07   Submitted required form to TIAA/CREF

01/08   Funds removed from TIAA/CREF

01/09   Rollover check mailed to SDIRA

01/19   SDIRA deposits check

01/20   Payment made to Lending Club

01/21   Money in Lending Club account

01/22   Bid on 4 notes and set up auto investing

First Week

The first week of the test accounts has finished with no surprises. It’s tempting to compare the performances, but I will not. It’s way too early.  But I will say that while the S&P 500 dropped this week, these test accounts did not.

The IRA rollover transfer for Lending Club is somewhere in the U.S. postal system, so there isn’t anything to report.

I was curious to see if the other three accounts updated the values of their holdings during the day. They do, but since these fall in the buy and hold category, there isn’t really any reason to check frequently.

The first week did provide an opportunity to compare the holdings of Betterment and Wealth Front.  They have about half of their ETFs in common, but with different amounts invested. I checked at mid week and they had about 53% of their balances in common.  So their overall performances should be highly correlated.

I did make an exception and looked at the weekend balances in the portfolios in Folio Investing. In this overall down week for the S&P 500 index, one of the five had an actual gain. It was the one I created using our allocations. I assume in up weeks for the market, these results would be reversed.

Test Accounts - Monday Update

Folio Investing – The funds were in the account by Saturday morning. I was able to create my own portfolio. It contained 12 ETFs reflecting the overall allocations I had decided to use for our investments. I placed an order for $2000 of this portfolio. It was scheduled to be executed in the next available trading window, which was this morning at 11 AM.  It resulted in purchases of the 12 ETFs ranging in values from $900 down to $20. Since I signed up for the annual commission, these were commission free.

I also entered $2000 orders each for 3 Ready To Go portfolios. “Dogs of the Dow” has the 10 stocks in the DOW with the highest dividend yields. “Analyst Upgrades” contains the 30 stocks with the greatest improvement in the Zack’s equity rating system during the past month. “Internet 5” consists of the 5 largest companies primarily engaged in the internet industry. The selection of these is based on the highest market caps. All of these portfolios equal weight the stocks they contain.

After these purchases were made at 11 AM, I entered my final $2000 purchase for the “Biotech” RTG portfolio. This includes the top 30 market cap sized companies from Zack’s list of securities with primary business operations in the Biotechnology industry. Again these are equally weighted in this portfolio. This purchase was made in the 2 PM trading window.

At the end of the day I had 75 stocks and 12 ETFs in my account.

Wealth Front – The funds were in my account on Monday morning and were invested today. They were distributed over 5 stock and 2 bond ETFs.

Lending Club IRA – The rollover funds are somewhere between my current IRA, the third party custodian, and Lending Club.

I’ll be updating with my first impressions in a few days.

Test Accounts

In my investigations I came across some interesting alternative investment platforms. I’ve documented these here. A few were of particular interest. I decided to open a test account in each and fund with $10,000. I was interested in seeing how easy they were to use and be able to track their performances.

Betterment – The account setup was done entirely online. First was a simple questionnaire that determined the allocation mix for me. In my case it was 55% stock and 45% bonds. You can modify your answers to change these, or manually adjust the allocations, but I did not. Next I filled out a form with personal information and some details about the bank account that will link to your Betterment account (for deposits and withdrawals).

Betterment used a standard approach to verify the bank. They made two small deposits and withdrawals. I checked the account and got these amounts and entered them on my Betterment account site. This verified that the bank linkage was valid. I then initiated a deposit. Once Betterment received the deposit they immediately allocated the balance over the funds they selected. In my case, this entire process took three days, and I had 11 ETFs in my account. It was an extremely easy process.

WealthFront – The setup process was the same as for Betterment. After the questionnaire, they suggested a mixture of 56% stock and 44% bonds. This is almost identical to Betterment’s recommendation.  The same micro deposit approach was used to link to the bank account.

I requested the deposits for both Betterment and WealthFront at the same time. The funds were sent from my bank early Thursday morning. By midday Thursday Betterment acknowledged receipt and allocated the money.

WealthFront uses another company to hold the assets and the requested funds were sent to this firm. This has introduced some delay. Also, from WealthFront, there will be a 2-3 delay before the funds are allocated.

Folio Investing – The setup for this account was a little different because I already had an account with them (from my Prosper peer to peer test account). This required a call to their customer service to straighten me out. Once I went in as an entirely new customer, the online account setup went easily. They did not offer to link my account to a bank. One of the deposit options was bill pay from a bank. This is the one I used.

There was some work to do once the account was funded. I needed to pick investments. I had decided to use some of their ready to go portfolios. I looked through the list picking likely candidates and viewed the details of several before settling on four (this research can actually be done before you open an account).

I also decided to build my own fifth portfolio that used the allocations I am using overall. I selected an ETF for each of my sub allocation classes. I tried to build this portfolio, but couldn’t until they receive my deposit.

Lending Club IRA – This was the most difficult of the four because it was an IRA (I don’t remember any difficulty when I setup the small regular account). The IRA is held by a third party custodian. This required setting up an account with the third party.

The third party did initiate a rollover from one of my current IRA custodians. This has initiated a complex process that will take some time.

I’ll update the status next week.

Allocation Update

I started these investment studies in November with two objectives in mind. First, after reviewing the results of my investment approaches over the past few years, I wasn’t happy with the results that I was achieving. My returns ranged from 2% to 5% per year.  While this isn’t bad in a period of very low interest rates, it pales in comparison to the performance of the stock market.

So I began looking at some investment alternatives and strategies. It occurred to me that some of these might be good alternatives for my friends and family. I’m afraid many of them are passive investors and wish to remain that way. That’s fine, but they may be giving a lot of money away. So I’ve been looking for some simple alternatives for them.

I started this blog as an attempt to document what I’ve learned and provide information for others. I’ve kind of been all over the place and now is the time to pull some of these threads together.

On my own investment strategy, I did decide on the asset allocations that I will use as targets. Then I began the rather laborious task of researching investment products and matching them to the allocations I selected. Quite frankly, I probably over obsessed during this step. Now I’m in the process of implementing. This will be an iterative process of research and purchases.

I’ve found some of the alternative investment vehicles to be attractive to me, and for my friends and family. I’ve decided to open accounts with four of the alternatives. I will be reporting on my experiences soon.

Folio Investing

Both Lending Club and Prosper use a brokerage house named Folio Investing to manage the trading of notes. When you want to buy or sell notes, you are redirected to Folio’s web site. The site is customized for each of the two, but they are very similar. The first time you go to Folio’s site they will establish an account for you with them. So we already have two accounts with Folio.

While looking at Folio’s web site, FolioInvesting.com, I found some interesting things. They are a regular brokerage firm with a few twists. You can open the standard variety of accounts with Folio. But there are several things in particular that I liked.

First they offer free trades for a flat monthly or annual fee. When I looked at my Fidelity account I was surprised that I spent a couple of thousand dollars on commissions in 2014. I believe Folio’s annual fee is $300.

You can enter marker orders anytime, but they batch them and execute them at 11 AM and 2 PM. I suspect this allows them to match these internally and reduce the volume that they have to go to the market for.

They encourage bundling stocks in portfolios. They allow fractional shares. So if you want to add funds to a portfolio, it will be distributed in fractional shares. This could be useful in rebalancing.

Finally they offer some predefined portfolios. Just looking at the rational and methodology of some of these makes me think that using these would be of interest.

I am going to open an account with them to fully understand how they work.

Santa Claus and New Year's Day Conclusion

Both the S&P 500 “wagers” concluded at 4 PM on January 5th. Based on the analysis of the S&P 500 index since 1950 we would have expected to return a profit by buying on both Christmas and New Year’s Eve. We would have expected an average return of 1.7% from the purchase on Christmas Eve with a 75% of a positive return. The New Year’s Eve purchase (with a much shorter holding period) had an expected return of 0.6%, with an 87% chance of a positive return.

The Santa Claus rally was a loser, down 2.9%.. In fact, only 2 of the 64 years were worse, 2007-08 and 1999-00.  So, what did the future hold for these two years?  In that fateful 2008, the S&P dropped another 4.6% by January 30th.  In 2000, the index was down by another 6.7% by January 30^th. Interestingly, both rallied by over 1.5% on the 31^st.

The New Year’s Eve wager was also a loser. The S&P 500 was down most of the day on January 2^nd. Just before 4 PM, it turned positive. Had it stayed there, that would be a sell signal for a minimal gain. But it went negative meaning hold for the next day. Well that was a disaster, and the wager lost 1.9%.

Since both were down, it was tempting to hold on a little longer and hope they recover over the next few days. But that wasn’t the original plan, and it’s time to implement the new investment plan by purchasing assets in proportion to the allocations that I established.  So I sold and took the losses.