Month: November 2017

Lending Club—No Bueno

Stocky Leave a comment

About two years ago we broadened our investment portfolio with this new-fangled things called peer-to-peer lending with Lending Club.  This has turned out to be a pretty major disappointment for us, and we are in the process of exiting the investment (which isn’t a quick process—more on this in a second).

Basically, the idea of peer-to-peer lending is like match.com for lenders and borrowers.  People who want to invest/lend money meet people who want to borrow money.  Borrows can get money they need at much lower rates and much less hassle than if they got a loan from a bank.  Lenders can earn interest at a much higher rate than they would get from a bank.  Banks are cut out of the process and everyone wins, right?

 

How it works

There are people looking to borrow money for debt consolidation/payoff credit cards (that’s about 80% of the loans), help their small business, pay for home renovations, etc.  Let’s say a given loan is for $10,000.  A bunch of lenders like us each kick in $50 or so, so you’ll be in this loan with hundreds of other people.  The person gets the money and then pays off the loan over 3-5 years.

Lending Club vets each loan and each applicant, and assigns a credit score.  That credit score determines the interest rate which can range from 5-20%.

As a lender you can go through all the thousands of loan application and pick which ones you want to lend to.  That’s fun at first, but quickly becomes a hassle, so you can just put it on auto-pilot and Lending Club will pick the loans for you.  That’s what we did.

 

What happened to us

In mid-2015 we opened our account, starting with $3000.  Of course, I watched the process like a hawk, from the loans I picked to when they started paying back.  At first it went great (isn’t that line in pretty much every movie, before everything goes to hell?).  We were getting paid back by all our loans, and our return was over 12%, which of course is amazing.  That’s free money.

We put more money in over the next couple months, and then when we sold our California house we put a big chunk ($60,000) in.  By that time, our account was worth about $100,000.  Through mid-2016 things were going well.  Our returns had inched down to about 10% (still spectacular), and I was congratulating myself on being a financial genius.

Towards the end of 2016 I started to see some of my loans default.  Of course, this is to be expected.  Some of the loans will go bad but those should be offset by the higher interest rate, and everything works out.  Still, it was a disturbing trend.

After a few months, the bad loans kept coming and my return steadily dropped, until it settled at 2.5% which is where it’s at today.  That’s crazy!!!  Obviously, there’s a huge difference between a 10% investment and a 2.5% one.

In early 2017 I decided to pull the plug, and stopped reinvesting my money.  Now, as the small loans (we have about 3000 out there) pay off, we take that money and put it back in our Vanguard account.  Unfortunately, this isn’t a fast process so it will take us about 5 years to unwind everything.  Oh well.

 

Why it works (or doesn’t)

On paper it sounds like one of those awesome ideas where the power of the internet changes an old business model for the better, and I think there’s a lot of truth in that.  It brings borrowers and lenders together and cuts out the middlemen, and lowers the borrowing costs substantially.

The problem lies in their ability to ensure payments are made.  Fundamentally, what is stopping borrowers from getting the money and then just going away and not paying?  It may not happen a lot, but it doesn’t take a lot of these to really kill your return.

I have a bit of insight here because I was a large enough account that I would get a call about once per quarter from them “seeing how I was doing”.  You can imagine the tone of these calls changed as my return dropped.

These loans are unsecured, so the only thing that makes borrows pay back is morality (I never want to count on that when it comes to money), the threat of negative marks on their credit rating, and the general badgering from Lending Club as it tries to collect.  With traditional bank loans that are collateralized, the threat of repossessing something seems a lot stronger.

Not difficult to predict, there was a large portion of the borrowers who would take the money and then not pay it back.  Some might be thieves who borrowed the money in a scam and never intended on paying back.  Others certainly intended on doing it but things didn’t work out.  Given the economy has been super strong the past couple years, this is especially troubling because it should be as good as it gets right now.

When someone stops paying Lending Club goes after them with phone calls, but those don’t seem really effective.  Seriously, what are they going to do?  Some delinquent borrows do starting paying back but most either never answer the phone, or they do and say/demand that Lending Club quit bothering them (there are actually notes lenders can see on all this activity).

I personally think that in our litigious environment today, lenders don’t have that much leverage.  Also, to avoid claims of bias or discrimination, it’s probably not easy to turn down borrower applications.  That leads to a perfect storm of crap that I think I got caught up in.

 

What is the lesson?

Investing is an interesting psychological experiment.  The simple approach of buy-and-hold broad index mutual funds is almost certainly the best, yet it’s the most boring.  When you’re doing that and things are going well, there’s that itch to see “what else you can do” and “what you can do better”.

That’s what happened to me, and most of the time that’s death.  That’s what happened with us and our commodities investment, which has been a major loser.  That was also the case with Lending Club, and we’ve had disappointing results (especially since stocks are up about 15% annually in the time we’ve invested in it).

So the lesson here is that it’s probably always better to stick with the boring but tried-and-true approach.  History is on your side here.  We have over 100 years of data on how stocks behave, in good times and bad.  Peer-to-peer lending is fairly new so you don’t really know how it will play out.  Maybe you’ll miss out on something that’s new but amazing (see: Bitcoin), but that leads to an interesting second point.

Many leaders—NFL head coaches, CEOs, politicians—say that success finding all the great things, but more avoiding the bad things.  Stocks are similar.  It’s a game rigged in your favor, but there are pitfalls along the way that are so tempting.  That’s where I think I tripped up.  Lending Club and commodities were sexy investments at the time, and it scratched that itch for me to be “doing something.”  And it hurt me.

Of course, that doesn’t mean we never innovate.  Peer-to-peer lending may turn into something big; digital currencies might turn into something big.  They might be important parts of a financial portfolio, but I think now is way too early a time to be putting my money down on that bet.  I know I’ll miss some big wins, but hopefully I’ll also avoid big losses and come out ahead.

Top 5 reasons to be thankful as an investor

Stocky Leave a comment

Today is a special day in the United States.  We reflect on all the amazing blessings we have in life—our families, our jobs, our friends.  For me it’s Foxy Lady, Lil’ Fox, and Mini Fox in some order.  There’s also world peace (more on that in a second), technology that has immeasurably improved our lives, and a little place called the United States of America.

However this is a personal finance blog, so what are the Top 5 reasons to be thankful (wearing an investing lens) for:

 

5. No wars—This is a pretty humanitarian one. In my lifetime, the biggest war the US (and the developed world for that matter) has fought is probably the Second Iraq War with 4500 deaths. That’s a tragedy for sure, but compare that to the generational death toll of US soldiers from war pre-1975: Vietnam-58,000; Korean War-37,000; World War II-405,000; World War I-117,000.  That alone is SO, SO much to be thankful for.

Of course, war is bad for investing.  It destroys buildings and infrastructure that is meant to produce things.  Once the war is over those things either need to be rebuilt which costs a lot, or people just move on and all that productivity is lost.  And that’s not even mentioning the dead, many of whom are educated and highly productive people.  No matter how you cut it, armed conflict is bad, and we’ve enjoyed an amazingly peaceful 40 years, even with those periodic skirmishes. That’s great for investing.

 

4. Tame inflation—When I was growing up, and even when I was in college in the late 1990s, we always thought inflation would naturally settle around 4-5%. Before then, expectations were even higher.

We all know that inflation relentlessly eats away at the purchasing power of our savings.  Some economists argue whether too low of inflation is good or bad (I think the lower the better), but everyone agrees that too high inflation is a bad thing.

For the past 10 years we’ve had inflation hovering around 1.5%, including 2015.  This year looks like it will be around 2.1% or so; that’s higher than it’s been in nearly a decade which speaks to how low inflation has been.

When you look at economic disasters over history, more often than not, they involve crazy inflation that has run out of control.  We’ve had a great run on this, and there’s no reason to think it will end any time soon.

 

3. A nation of laws—It’s easy to get caught up in all the BS of politics and a 24-hour newscycle that our nation is facing right now. One might think that the country’s going to hell, but it’s not.

Things work.  We have rules that 99.99% of the people follow 99.99% of the time, and the system works.  This is especially true in the stock market where by and large it’s a fair game.  There haven’t been any major scandals or houses of cards like we saw in 2008 or 2001 or even 1929.

There’s always going to be some level of shenanigans just based on the nature of greed, but as an investor I do feel things are on the up and up.  So long as that’s the case, we’ll make money.

 

2. A 9-year bull market—So far in 2017, stocks are up about 20%. That’s pretty astounding. That has created a tremendous amount of wealth for common investors.  That’s an incredibly democratizing process.

As good as this year has been, it’s just the latest in a string of amazing years since 2008.  However, if you take a longer view, over the last 40-years, things have been equally spectacular.  The average return since the year of my birth (1977) . . . over 11%.  And that’s compounded annually which is something all those 4th and 5th graders from the Summerfield Open will appreciate.

We’re on a good run right now, and of course it will slow down at some point, the timing which Robert Schiller and I disagree on (and I’ve been proved right so far).  But even a longer-term view shows how good things have been, and really there’s no reason to think the future will be otherwise.

 

1. Internet—I’ve mentioned this a number of times, but it’s hard to overstate the amazingly positive impact the internet has had on investing. First, it makes actual investing so much easier. You can research companies more efficiently than could have been imagined pre-1995.  Also, you can actually conduct transactions so much easier, compared to before when you had to do everything over the phone with a broker.

Also, there are those little companies called Amazon, Microsoft, Apple, Google, Facebook, and a slew of others.  Those all have business models based on the internet.  They have brought tremendous benefits to society, and along the way have made tons of money which has gone to their investors, this one included.

 

So many things are more important than money and investing, and those are at the top of my list of things I am thankful for as I dig into my turkey today.  However, wealth is a great enabler.  For me it allowed me to quit my job to become a full-time stay at home fox for my two cubs.  To the degree that my investments facilitate that, I am thankful for investment tailwinds like the five I just mentioned.

Everyone, have a great Thanksgiving.

Should you use an investment adviser?

Stocky 2 Comments

I started writing this blog because I wanted to share my own experiences with investing, including how to navigate the complex world of investing on your own.  I am a firm believer in DIY financial management.  That is what worked for me, and I believe all people can get really great results doing it on their own.  That said, many readers ask about using a broker or investment adviser or financial planner.  Here’s my take.

Quick disclosure: I am an investment adviser.  I passed my Series 65 and work with a small number of friends, helping them with their finances.

 

Are financial professionals worth it?

As with any purchase you make, you need to evaluate a investment adviser on the basis of how much she costs, and how much value you get in return.  On the surface I would say “no, it probably isn’t worth it,” however there are definitely some factors which may reverse that decision.

First, let’s look at how much investment advisers cost.  The rates range widely.  Plus there isn’t a lot of transparency in the marketplace so it’s not always easy to know what the going rate is.  My experience says that 1-2% is typical.  This can come in many forms—typically brokers get paid fees from the mutual funds they suggest for you or from the transaction costs for trades.  Advisers tend to charge a percentage of your portfolio.  We know that 1% coupons are really valuable, so those fees are a lot.  Over an investing career they can add up to hundreds of thousands of dollars.  That’s a pretty big deal.

Of course, if you’re getting a lot of value from your investment adviser, maybe it’s worth it.  One of the main missions of this blog is to show you how you can invest successfully on your own, and I think most people can do that without having to hire a professional.  Sure you have to make decisions on asset allocation, which accounts to use, what investments to make; but those aren’t really all that complex.  Also, thanks to the efficient market lessons from A Random Walk Down Wall Street we know that you’re as good a stock picker as anyone.

So my general feeling is that investment professionals aren’t worth the money; a motivated investor can do just as well on their own and pocket the fees.  Wait, what???  You said “motivated”.  As it turns out, a lot of people, despite their best intentions, aren’t able to put their financial plan in motion.  If you’re one of those people, and if an investment adviser can help motivate you to do the right things, then I do think they are more than worth it.

In this way, investment advisers are a lot like personal trainers.  Most of us know that exercise is good for us, and most of us know how to run on the treadmill and lift weights properly (or you can find out by watching a 3-minute video on Youtube).  But if a trainer can motivate you to actually hit the treadmill and the weights, they’re definitely worth the money, right?  How much is your physical health worth to you?  Same thing with finances.  If you know what you should be doing, but for one of a million reasons you never end up actually doing it, maybe you should get an investment adviser to help you out.

Nearly every post I’ve done shows that there is a ton of value out there if you invest properly, taking into account things like time horizon, taxes, etc.  But if you don’t do anything, you’re losing ALL that value.  In fact, loyal reader Jessamyn noted that studies show that investment advisors do increase returns about 3%.  That’s a ton, especially because we know how much a 1% coupon is worth.  Are they magic?  Can they predict the future?  No.  The data shows that investment advisors help people do what they are supposed to–keep track with their plan, invest regularly, don’t panic when the market goes crazy, etc.

If an investment adviser helps you in ways you won’t or can’t, then you’ll probably end up ahead of the game, even after you take his fees into account.

 

How would you pick a financial professional?

So let’s say you’ve decided that an investment adviser makes sense for you.  How do you pick a good one?  This is one of the biggest challenges, and in my opinion one of the reasons a lot of people don’t get investment advisers: They don’t know a good one they can trust.  The problem is there are a ton of them and the quality varies greatly.  Sadly, there are a lot of unskilled people in the industry who don’t know what they’re doing.  Even worse, there are some real shysters who might take your money, either overtly steal it or use other schemes to siphon away your money and put it in their pockets.  It’s a legitimate concern.

First, you need to find someone you can trust.  Ideally, this would come from a personal reference.  Today you also have things like yelp.com or Angie’s List that gives ratings.  Additionally, there are government agencies like FINRA.org that track these people so you can look them up to see how long they have been around and any complaints that have been files against them, etc.  These are okay, but for my money, nothing beats a personal reference from someone you trust.  Of course, it’s not always easy to have those conversations with friends: “So Mary, who is helping you with your money, and can I talk to them?”

Second, you need to find someone who is good.  Of course, knowing this isn’t always easy.  Using that same personal trainer analogy, you probably wouldn’t hire an obese trainer.  You’d want someone who is ripped, someone who has shown they have been successful at physical fitness themselves (like my totally buff friends Christel and Tobias).

Tobias
If you have a personal trainer, he should be ripped like Tobias here. Similarly, if you have an investment adviser, that person should be somewhat wealthy.

 

Similarly, you want a rich investment adviser.  You want someone who has been successful creating wealth for themselves.  But this is where the challenge comes in: if the investment adviser is wealthy then why is he working with you?  Seriously.  You have a lot of young kids who are doing this (let’s say less than 30).  I’m sure there are some good ones, but I’m not trusting my family’s financial wellbeing to someone without a lot of experience.  You also have a lot of people who just aren’t that good.  If someone has been an investment adviser for 10 or 20 years and they aren’t a multi-millionaire, how good can they really be?  I’m not trying to be mean, but shouldn’t that be more than enough time to accumulate some serious wealth?

 

Questions to ask:

If you do decide to go with a investment adviser, make sure you ask a lot, A LOT, of questions.  Beyond your doctor or minister/rabbi, this person will probably have the biggest impact on your wellbeing.  Take the time to make sure you find a good one.

How long have you been doing this?  This is an area where experience definitely matters.  In particular, you want her to have lived through a few bear markets.  At a minimum she should have been doing advising people since 2008 and even better if she’s been doing it since 2001.

What did you do during 2001 and 2008?  Investing is a lot easier when things are going well.  You prove your mettle during the tough times.  Figure out how he handled himself when everyone thought the world was coming to an end.

What are you paid?  This should be answered in excruciating detail.  Does he get paid by you (how is the amount determined, when is it paid), by others like mutual fund companies (how much, how do you make sure you serve my interests ahead of theirs)?

What is your personal financial situation?  No point sugar-coating it.  Find what his financial situation is like.  As mentioned above, if he isn’t pretty well off, how good is he really?  Also, the relationship you have with him needs to be based on trust because you’re going to be sharing everything with him.  If he isn’t willing to reciprocate in some way, that might tell you something.

How will you ensure you serve my best interests?  This is a biggie.  Ideally you want her to have a fiduciary relationship which is a legal standard where she serves your interests ahead of anyone else’s, including her own.  No matter how this turns out, you’re going to need to trust this person, but you should get a sense of how she will ensure that you are #1.

What is your investing strategy?  Obviously, there are a lot of nuisances to this, especially as he customizes it to your specific situation.  But he should definitely have an approach and a philosophy that he can articulate clearly and understandably.

What type of power will you have over my money?  Will she be able to make trades and move money between accounts with your express permission, on her own, or not at all?  This is a tricky one because maybe you want to offload these activities completely, so her having a ton of control may be okay.  No matter, you should definitely understand this completely.

How will you take into account other assets that you won’t manage?  Most situations will have him managing an account like your IRA or brokerage account but not others like your 401k, mortgage, pension, etc.  Most times, he’s only paid on the accounts he manages, but to do his job well he’ll need to take into consideration those other accounts as well.

 

Those are what I came up with off the top of my head.  At the end of the day, if you do go with an investment adviser make sure you find someone who has demonstrated they have the skills to build your wealth.  Just as importantly, make sure you find someone who you can trust completely.

My, oh my, how money has changed

Stocky 1 Comment

We just got back from a trip to Disney with Lil’ Fox and Mini Fox.  As an aside, Disney World is a pretty amazing place and I highly recommend it to anyone.

While we were on the trip, I was thinking about similar trips my dad took with me and trips his parents took with him.  Because I always think about finance and money, it got me thinking how people paid for those trips—not necessarily how they saved for the trips (which is, of course, an important thing), but how they actually paid money at the point of sale.

Money seems like a real constant in our lives for decades and centuries and millennia.  However, it’s hard to think of something so central to our lives that has changed so drastically over such a short period of time.  In the past 100 years it has changed more than food or clothes or shelter.

 

Things used to be really risky and inconvenient

Back in the day, let’s say when my dad was a cub in the 1950s, everything was paid in for in cash.  There were innovations like Traveler’s Checks that substituted for cash, and I imagine many people thought of those the way today many people think of Bitcoin—kind of confusing and you aren’t really sure you “get it”.  It was just easier to use cash, something they understood and were used to.

Pretty much all of life revolved around having a ton of cash on hand to conduct your life- -groceries, gas, vacations, washing machines, everything.  That was hugely inconvenient and also incredibly risky.  I remember my grandfather taking about his money belt and false wallet, both tools meant to counteract enterprising pickpockets.

A couple decades later, let’s say the 1970s, charge cards hit the scene, first for department stores and gas stations.  Those could only be used at a specific store (your Sears card could only be used at Sears), so that wasn’t super convenient, but it was a major improvement.

In the 1980s, credit cards as we know them today became widespread.  Credit cards cousin, debit cards, which act in pretty much the same way but deduct straight from your checking account, were being used broadly by the 1990s.  Even though that’s where we are today, even credit cards have evolved in a major way.

 

The modern art of buying

Today the vast majority of retail transactions are done with credit cards, but the credit card you’re using is very different from the one my dad used in 1983.  Probably the biggest difference is that nearly every credit card offers a pretty substantial bonus of some sort.  It can be airline miles or hotel points or cash.  This can be a pretty big deal.

The Fox family plays credit card roulette (we get a new credit card every few months to take advantage of their initial purchase bonuses) and that nets us about $2,500 each year.  That just paid for our vacation.

All that said, we are very far from the cutting edge when it comes to this stuff.  In the mid-2000s this crazy thing called “Paypal” hit the scene.  When I was in grad school the cooler kids were using Paypal and paying each other for stuff.  I didn’t fully get it, and I admit that I don’t use it today.  Nonetheless peer-to-peer pay networks were here.

Fast-forward a few years and you got digital currencies like Bitcoin.  As much as I don’t fully understand Paypal, I understand Bitcoin even less.  What I do know is that Paypal was based on US dollars but offered a different and more convenient way to pay.  Now it seems Bitcoin is based on its own currency and then also offers a different and more convenient way to pay.

Add on to that, if you like a bit more risk in your investing portfolio, Bitcoins themselves, beyond just the ability to pay for stuff, can go up or down in value so it that way it looks like an investment (or gamble).  One Bitcoin was worth $1000 at the start of the year and now is worth about $7000.  Crazy.

 

What it all means?

For finance and history nerds like me, I think this is a really fascinating study.  I have always said that inflation is way overstated and I think we can find one of the reasons here.  Think about how much easier and faster things are for businesses now with credit cards and other electronic financing compared to the cash economy of my grandfather’s time.  That impacts nearly everything so the stakes are high.  That savings gets passed on to the consumer, and we get lower inflation.  Score.

Second, today, there’s a huge upside to using money innovations like credit card rewards.  It can pay for our Disney vacation every real.  That just became real.

If credit card rewards can do that for me today, and I admit I’m a late adopter when it comes to this stuff, what is the upside still out there.  Are there similar dollars provided by the Paypals and Bitcoins of the world that I just don’t understand enough yet to pick up off the ground?  Probably.

Are there going to be further money innovations in the future that will provide even more dollars?  Certainly.  I don’t know what they are in a similar way my dad in 1983 could never have imagined Paypal or Bitcoin, but they’ll certainly be there.  If today I’m basically getting a vacation for free, who knows what money innovations will bring me over the next few years.

Maybe that should motivate me to figure out this crazy, newfangled Paypal and Bitcoin things.