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Investing Articles

Betterment.com Wants to Replace Your Saving Account

June 5, 2010 | Investing | Videos | 1 Comment

Betterment.com (a new startup) wants to replace your bank’s saving account, which pays almost nothing; to an investment account that promises to pays more.  (See video below).

Savings accounts are simple and low risk with low interest rates.  Investment account may promise higher returns, however, they can often be complex and confusing.  Betterment has created a new category that offers the returns of investing with less complexity or hassle.

When customers deposit money in their Betterment account, the money is invested in their chosen blend of diverse stocks or a portfolio of US Treasury bonds.   Customers can allocate funds between these two investment options, setting the level of risk they’re comfortable with. Opening an account takes about 5 minutes, there’s no minimum balance, and transfers are free.

When customers deposit money with Betterment, their money is transferred to Betterment Securities (their broker-dealer), with instructions to buy ETFs (exchange-traded funds, similar to mutual funds) based on their desired allocation between stocks and bonds. Customers own shares in the ETFs, while Betterment recommends and manages buying and selling.

Betterment charges an annual fee of 0.9%, based on a customer’s average balance which is a quarter percent lower than the average mutual fund fee and much less than the average amount banks make off of customer deposits.

Betterment is a Registered Investment Advisor and Betterment Securities is a broker-dealer regulated by FINRA and the SEC. Betterment’s SIPC coverage means that the securities in user accounts are protected up to $500,000 (for more information, visit www.sipc.org).

Since Betterment invests customer’s money in the stock market, they can lose money if the market goes down.  Balances will fluctuate based on market conditions.  Over the long term customers should get a much better return that their savings account.

Betterment currently only operates in the United States.

Betterment.com is currently offering $25 when you open a new account. For more information visit Betterment.com

My Lending Club Account Performance Update 3

May 13, 2010 | Investing | My Ramblings | 5 Comments

It’s time for another update of my Lending Club Account Performance. The last update was on February 20, 2010.  Since then Lending Club has revamped their website and changed their logo (see below).  The new site is easier to navigate and features different background pictures which I guess is cool!

Since starting to issue loans last August (2009), I’ve earned a total of $1,483.68 in interest, but with and interest plus bonus I’ve earned $2,196.75.  I currently have 456 notes (loans) issued with 14 fully paid.  One note is currently late 16-30 days and 3 are late 31 to 120 days.  One was charged off with a loss of $24.  Calculated net annualized return is 10.83%.  Total payments to date (principal and interest) is $7,050.89.  (See screen shot below)

As notes are paid back I’ve re-invested in new notes to A, B, and C investors using the Build Portfolio feature.  I use the filter option to only list A, B, and C investors and issue $25 notes to each borrower.  Additionally,  I use the Conservative and Moderate portfolios to loan to mostly A and B investors.

I do not review the notes to determine the reason why each borrower want the money.  I’m more concerned about the borrower rating (A, B, C).  Reviewing each note would be very time consuming and there is no way to really determine risk.

According to Lending Club, there are now 35,000 investors and 220,000 members.  Investors have earned an average return of 9.65%.  The company announced last month the closing of a $24.5 million investment and just recently added 5 year notes.  Before only 3 year notes were available. The 5 year notes pay a higher interest than the 3 year notes. I’m not certain if I’ll invest in 5 year notes as yet!

So far so good,   I’m happy with my account performance.  If Lending Club was a profitable entity I’d consider investing more money.  However, for now I’ll take the wait and see approach to see how the company does over the next several months.

Lending Club is offer $25 for free when you sign-up as an investor at no risk.  You can use the $25 to try out P2P lending with no future obligation.  There is nothing for you to deposit and you can lend the $25 immediately.

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My Lending Club Account Performance Update 2

February 20, 2010 | Investing | My Ramblings | 8 Comments

My previous update of my Lending Club Account Performance was back in September 30, 2009.  How time flies by so quickly.  I promised then to do periodic updates of my account performance.

Since then I’ve deposited an additional $20,000 in my account because Lending Club was paying a 1% bonus to deposit and invest the money by the end of December 2009. That’s another cool $200 in bonus I couldn’t resist.  

Since I’ve invested in Lending Club, loan payments to date total $3,041.23 with zero late payments or loan defaults.  That is very good news.  I hope the trend continues.

I have only invested in A, B and C borrowers which are the lowest risk borrowers; however, the return is lower than the more risky borrowers (D, E, F, and G).

I currently have 353 outstanding notes (loans to 353 individuals) ranging from $25 to $250. As the money is paid back I’ve reinvested it to other borrowers.

Since I started funding notes in August 2009, I’ve earned $669.78 in interest, but with bonuses I’ve earned a total of $1,492.20.  The net annualized return estimated is currently almost 11%.  See screenshot below of account summary.

Update: Lending Club is offer $25 for free when you sign-up as an investor at no risk.  You can use the $25 to try out P2P lending with no future obligation.  There is nothing for you to deposit and you can lend the $25 immediately.

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When in Rome, Don’t Do What the Romans Do

February 2, 2010 | Investing | My Ramblings | No Comments

I’ve been watching a lot of “American Greed” on CNBC lately, and it reminds me of someone that I know personally.  For privacy purposes, I’ll call him Bob. 

When I first met him, I was very impressed with him.  Bob lived in a sprawling mansion in a gated community with expensive cars parked outside his home.  

This week I found out he’s currently in federal custody, looking at up to 30 years in prison with a $1 million fine, as a result of his white collar crimes.  He has plead guilty to bank fraud and conspiracy to commit bank, mail, and wire fraud in connection with a scheme to fraudulently obtain millions of dollars of mortgage loans from lenders.

Bob is 4 years younger than me and when I first met him I thought to myself, “Wow, this guy is doing very well.  I wonder what he does for a living.”   I quickly learned from Bob that he was a real-estate developer who built million dollar custom homes and he also owned a real-estate investment company. 

I was interested in learning more about Bob’s business and one day he explained the process to me.  Basically, his real-estate investment company helped people find homes below market values, where he would help renovate (if needed) and help to put section 8 tenants in the home, all this for a very steep fee of up to $30,000.  People flew from all over the country to have Bob hold their hands to invest with him.  He would wine and dine them and when they visited his mansion, they were hooked!

Bob said if I was interested in investing with him to let him know.   At the time I was laid-off, so I told Bob there was no way I would be able to get a loan because I was unemployed.  He told me he could help me get a loan by stating I was a consultant employed by his company.  That would have been totally illegal, but at the time I didn’t think about it.  However, there was no way I would invest with Bob because I would never pay his hefty fees of up to $30,000.  I would do the work myself.

What Bob failed to explain to me back then, which ultimately landed him in trouble, was that he helped his client falsify mortgage applications to get loans that they probably didn’t qualify for.  He also paid kickbacks to appraisers so they appraised his client’s homes for much more than they were worth so his clients could pull equity out their investment properties.  He was also in bed with a local corrupt bank which went belly-up to conduct much of these transactions.  The CEO/Co-Founder of the bank recently pleaded guilty to fraud and is also looking at 30 years in prison and a $1 million fine.

Another problem that caused Bob to get a lot of attention was that he didn’t take care of his customers.  Once he got their money he pretty much dropped catering to them.  He didn’t return phone calls, and things fell apart when transactions were not handled the way they should have been.  When the real-estate market started going south, even more investors started complaining.

In following Bob’s case there are a few things I’ve realized:

  1. Follow the law.  This is the obvious.  There are no shortcuts and eventually things will catch up with you.
  2. Offer excellent customer service (crook or no-crook) because with the Internet people can easily ruin your reputation and get the authorities to notice you.  Before the Internet had blogs and forums, it would have been difficult for all the investors to find each other to discuss their common problems.
  3. There is limited privacy with the Internet.  I suspect Bob may have to change his name if he ever decides to look for a job in the future when he gets out of prison.  Google his name and all sorts of articles with his picture appear.  The Internet can be deadly!
  4. Nothing goes up in a straight line.  Just like the Internet Bubble, the real-estate market and the economy, things eventually go down.  If the real-estate market and economy was still hot, Bob would have still been in business.  His clients may have complained about his poor customer service, but they may have been happy with the value of their property increasing.
  5. When it Rome DON’T do what the Romans do.  Back when everyone was making money in real-estate, everyone looked the other way.  The banks, Wall Street, mortgage brokers, real-estate lawyers, borrowers and appraisers all looked the other way.  They knew most of these loans were bad but they were still processed only to get paid.  We all know what happened after! 

My Lending Club Account Performance, So Far, So Good

September 30, 2009 | Investing | My Ramblings | 3 Comments

Back in July I opened an account with Lending Club to make some money.  The banks aren’t paying squat with interest and even CDs aren’t paying that much.  Right now I’m staying away from the stock market after losing money over the last several years.

After doing some research I found Lending Club compelling and decided to initially open an account with $5,000.  However, I added another $5,000 when Lending Club offered a $200 bonus for new accounts with at least $10,000 (after watching their webinar – presentation via the Web).  Lending Club also offered to help me with lending the loans.  I just had to tell them what risk level I was comfortable with.  I also found this compelling because I didn’t have to worry about whom to choose to lend to.
 
For those not familiar with Lending Club, it is a social lending network that brings together investors and creditworthy borrowers to lend money that cuts out the middle man; traditional banks.  The process is sometimes referred to Peer-to-Peer lending (P2P). Lending Club takes a small 1% commission from lenders to conduct business.  Borrowers pay a processing fee depending on their creditworthiness which range from 0.75% to 3.5% of the loan value.  (Read more here about how Lending Club works).

In August/September most of the $10,200 was loaned to 85 individuals.  So the average loan is about $120.  To date my account total is $10,521.53 with payments to date of $373.87 ($290.50 principal, $84.37 interest, $0 late fees).  To date  that’s a  5.2% return (includes the $200 bonus).  Without the bonus the return is 3.2%.  Not bad at all!  Lending Club has calculated that my net annualized return should be 11.05%.  Where can you get that type of return today?  This assumes of course that the loans are all repaid.  (See screen shots below)

Lending Club Account Summary

Lending-Club-Account-Summary

Lending Club ranks borrowers from A to E.  A being the lowest credit risk, however, with the lowest interest rate.  E is the highest risk, however, with the highest interest rate.  Starting out I was conservative and only loaned to A and B borrowers.  According to Lending Club no A borrower has ever defaulted on a loan. Over the next several months I’ll post updates of my Lending Club account performance.

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For more information visit LendingClub.com.

Earn a High Interest Rate with Lending Club P2P Loans

July 24, 2009 | Investing | 4 Comments

Last Tuesday I wrote a post about getting a low interest loan from Lending Club.  However, on the flip side you can be a lender and make a much higher return on your money than any bank can currently pay; even with a CD.  This post is about becoming a lender or investor.

Lending Club is a social lending network that brings together investors and creditworthy borrowers to lend money that cuts out the middle man; traditional banks.  The process is sometimes referred to Peer-to-Peer lending (P2P). Lending Club takes a small 1% commission from lenders to conduct busines.  Borrowers pay a processing fee depending on their creditworthiness which range from 0.75% to 3.5% of the loan value. 

Lending Club can afford to do this because they have very low overhead by offering their service via the Internet with an automated system.  They have no brick and mortar locations, ATM machines, many employees, etc., that a typical bank has.

There is risk with lending your money to individuals; however, Lending Club does a very good job of qualifying good borrowers based on their credit score (minimum of 660 required), debt-to-income ratio (excluding mortgage) below 25% and credit history that shows borrowers are responsible.  

Lending Club accepts 1 out of every 10 people who apply for a loan.  Interest rates are determined by risk.  Borrowers that are ranked as low risk can borrow at lower interest rates, while borrowers that are ranked as higher risk will pay a higher interest rate.  So lenders can get a higher interest rate if they are willing to take on higher risk loans.  Loan requests are attributed to Lending Club grade ranging from A1 to G5.  See screen shot below.

Lending-Club-Loan-Grade-Interest-Rate

To minimize risk, lenders can find borrows based on credit scores, debt-to-income ratio, delinquencies (last 2 years), and funding status.    See screen shot below.

lending-club-search

Loans are 3 years, however, you can sell your loan at any point and according to Lending Club it normally takes 2 and ½ day to sell your loan.  

Lending Club also allows you to easy reinvest your returns based on your cash available and your desired interest rate. See screen shot below

lending-club-reinvest-screen-shot

Yesterday Lending Club had a Webinar (presentation via the Web) and stated that over the last 2 years Lending Club has had much higher returns when compared to 1-3 Year Treasuries, iBoxx High Yield Corporate Bond Fund, NASDAQ and S-And-P 500.    See slide below.

lending-club-returns2

I recently opened an account with Lending Club and hope to get some of these nice returns!  For more information visit Lending Club.

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