In the early days of Lend Academy I regularly wrote about my investment strategy for Lending Club and Prosper. I discussed the wonders of filtering and how analysis of historical trends can really boost returns. There is a popular saying, though, when it comes to investing: “past performance is no guarantee of future returns”. So it goes with marketplace lending.
Ryan covered this in some depth in this post a few months back. A few years ago E-grade loans at Lending Club were the best performing investment out of all their loan grades. In 2015 they were the worst performers. If you look at the analysis that Ryan did you will notice that B-grade loans from 2015 are the best performing segment.
So, if you were like me and you saw that D, E and F-grade loans were the best performing loans historically you focused your investments on those grades. But a person with a portfolio of B-grade loans would have likely outperformed the D, E and F-grade investments in 2015 and 2016. Now, we have had many interest rate increases since then so again the future may well be different from the past, we just don’t know. I guess my point is it pays to be well diversified.
The other point to note here is that, despite the challenges from 2015, Lending Club and Prosper are generally getting better at underwriting. What I mean by that is that it is more difficult today to find pockets of miss-pricing than it was a few years back. Whereas you could easily see a 4% or 5% lift in returns by applying some simple filters today the lift is more like 0.5% or 1%. And of course, there are no guarantees there will be any lift at all.
Regardless, I think it is still useful to apply some basic filters, particularly if you have multiple accounts, and so I will share below my strategies that I am using across my myriad of investment accounts at Lending Club and Prosper.
How to Actually Invest
Before I get to my strategies I want to share the different options for investors to actually place investments:
- Do it manually – login on a regular basis and browse the available loans to make your investment.
- Automated platform tools – both Lending Club and Prosper allow investors to setup automated investing.
- Third party tools – NSR Invest and LendingRobot both offer tools to allow automated investing. Investors can choose a predefined strategy or deploy a custom filtering strategy.
Most of my Lending Club accounts I invest through NSR although I do manage one through LendingRobot and for another I use Lending Club’s automated investing tool. For Prosper I invest through NSR using my own strategies as well as one of NSR’s fully managed options and I also use Prosper’s automated tools.
A couple more thoughts before I get into the details of my strategies. First, as I said above I think it is important to have full diversification among long grades and you can do this between accounts or if you only have one account you can do it by applying multiple filters to one account. Of course, you can also just choose all loan grades for any given filter.
Second, you should pay attention to the impact of taxation. If investing via a taxable account you should keep in mind that you can only deduct $3,000 in total losses every year (losses can carry forward to future years) but you will pay taxes on all your interest earned. For this reason, I keep the lower risk investments in my taxable accounts to minimize my losses.
Lending Club Main – Super Simple High Income Low Risk
Loan Grades: A, B, C
Income >= $7,500 per month
Inquiries = 0 (no credit inquiries in the past six months)
Lending Club Roth IRA – Joint Applications
Loan Grades: B, C, D, E
Joint Application (means the loan has a co-borrower)
Lending Club Traditional IRA – Moderate Income
Loan Grades: C, D, E, F, G
Income >= 3,000 and < $7,500 per month
Inquiries = 0
Debt to Income ratio <= 20
Home Ownership: Mortgage
Lending Club Roth IRA 2 – Super Simple High Income High Risk
Loan Grades: D, E, F, G
Income >= $7,500 per month
Inquiries = 0
Lending Club Traditional IRA 2 – 1-2 Inquiries
Loan Grades: B, C, D, E
Income >= $7,500 per month
Inquires = 1 or 2
Loan Purpose = Credit-card or Debt-consolidation
Home Ownership: Mortgage
Public Records = 0
States: All excluding Nevada
Debt to Income Ratio< 20
Prosper Main (2 Filters)
- High Income
Prosper Rating: AA, A, B, C, D
Income Range: $75,000 – $99,999, $100,000+
Inquiries = 0
- Previous Borrowers
Loan Grade: B, C, D, E
Previous loans >= 1
Payments on previous loans >= 18
Number of late payments <= 1
Inquiries = 0
Current delinquencies = 0
Prosper 2
Prosper Rating: E, HR
Income Range: $100,000+
Inquiries = 0
Prosper Roth IRA
Managed by NSR Invest – Balanced Strategy (proprietary credit model)
More Thoughts on Filtering
I realize most people are not like me – I have eight accounts between the two platforms. I like to make my filters mutually exclusive between accounts, for the most part, so I am not investing in the same loan in multiple accounts.
As I said above we simply don’t know which loan grades are going to perform best in coming years. If and when we have another recession it is quite possible that A-grade loans will be the best performers in that situation. Or the economy could keep chugging along nicely and we may find that E-grade loans are the best performers in today’s vintages. Which is why I like to invest across all loan grades.
You can see that in most of my accounts I favor high income and zero credit inquiries. This is because both of those filters have consistently given a slight increase in returns for many years. If you want to explore filtering for yourself you should head on over to NSR Platform. There, you can run inquiries against the full history of Lending Club and Prosper data and see for yourself what has worked in the past.
Let me know what you think. I am happy to hear from other investors who have different strategies and also happy to answer any questions investors have.
Full disclosure: NSR Invest and NSR Platform are sister properties of Lend Academy.
