October 23, 2013 | Posted in:Investing

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live long and prosper - alternative investmentsEarlier this year Mrs. JM decided to give investing a shot, as a novice investor she chose the easiest way ever to invest. Later during the year, I decided to diversify the portfolio, and up the risk factor a little bit and give my money to complete strangers.

However, I haven’t kept you up to date with the returns for either of these endeavors, so here is an initial look at how things are going so far.

I’m going to create a separate page soon for future articles of this nature, and update it monthly so the readers who don’t give a shit about this kind of stuff don’t feel like they’re being spammed.

Betterment: Investing Made Very Easy

Betterment Returns - alternative investmentsBetterment is a pretty awesome company. They offer taxable investment accounts, as well as Roth IRAs. The secret to their success lies in its simplicity.

If you’re a total beginner, and want to learn a little bit about the stock market through experience, then setting up a Betterment account is the single best action you may ever take. For those who have plenty of experience, you should probably head to Vanguard or your preferred stock broker.

Since we opened our Betterment account in February 2013 with an allocation of 100% stocks and 0% bonds we’ve seen an average growth of 8.0% over the 8 month period.

Those that have a brief understanding of the stock market may be thinking: Hasn’t the stock market gone up over 15% in the past 8 months, and yes you’re completely right. But, one thing you have to understand when you’re investing a set amount of cash every month is that you will more than likely reduce or increase your overall average returns with every deposit you make.

What I mean by this is that our initial Betterment investment in February has grown 14.1%, and our most recent contribution within the past week has only increased 0.7%. We’re only really concerned with the overall return, though, which is only about 2% lower than the S&P 500 index over the same period of time. This concept is know as Dollar Cost Averaging.

Without knowing anything about the stock market, besides the fact that it’s a magical place to make money, you could have almost matched the growth of the overall US Stock Market. The fact that Betterment allocates the majority of your stock holdings into Vanguard ETFs should say something about the quality of the company and your portfolio.

If you haven’t opened a Betterment account yet, and need even more convincing, you can have a free $25 just for opening an account here:

Propser: Peer-to-Peer Lending Like A Boss

Prosper Returns - alternative investmentsTo add a little bit of diversity to our portfolio I thought to myself what could be a better way to make money, than to help others who need money. The answer to that question was NOTHING, of course!

My love for great returns and for helping people in need led directly to the social lending site Prosper.

Since banks don’t really like to give out unsecured loans — especially to people who don’t have perfect credit profiles – there are usually hundreds of loan applicants looking for funding from other real life people, like you and me. After their loans are funded and they receive the money they’ll repay the principle balance plus interest to you, and everyone is happy.

Prosper’s seasoned returns are estimated to fall in the 9-11% range. There is an apparent risk vs. reward aspect to their seasoned returns model. Loans with a “C” grade and lower are considered very risky, which is a reason they have such high interest rates tacked onto them. They also have a higher rate of default.

So far my 2-month old account has seen gains of 4.88%. At the time of purchasing the bulk of my notes there were only “AA” and “A” grade loans available. The low risk nature of these loans also reduces the interest paid out by the borrower, which means less money in your pocket at the end of the day (still more than a savings account or CD!).

Since that first initial buy, I’ve seen lower grade loans enter the marketplace and if their details pass my inspection, I’ll try to buy notes — or portions — of the loans to increase the potential for my overall portfolio.

As it stands right now I’ve had ZERO defaults, the accounts have an average yield of 10.38%, and all 37 notes are currently up to date on their payments. My returns aren’t “seasoned” yet, so we’ll see how that pans out over the next few months.

While buying notes from the Prosper Marketplace isn’t as easy as the set-it-and-forget-it style of investing offered by Betterment, they are able to provide an efficient investment opportunity that didn’t exist until recently.

Take advantage of the Loan Marketplace before the big time investment vultures swoop in. They’ve been known to squeeze the little guy out of a good opportunity. Sign up here:

*I refuse to disclose the total size of our investments for obvious reasons, but returns are returns regardless of investment size.

**While P2P Lending and Betterment are both great, 99% of our portfolio consists of low-cost index funds at Vanguard.

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11 Comments

  1. Retire Before Dad
    October 24, 2013

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    Johnny,

    I am also in the early phase of P2P lending, with Lending Club. Opened my account in May 2013. My hope is that these kinds of lending vehicles are here to stay, and expand into different categories (small biz, mortgage, etc). We’ll see how it develops.

  2. writing2reality
    October 24, 2013

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    Congrats on getting involved with Prosper JM! I love peer-to-peer lending and a big fan of the consistent returns that can be achieved over the long haul. My taxable Lending Club account has returned over 10% in the four years I’ve had it. Best of luck as you continue to grow the account and expand your risk tolerance. You will find your returns will increase nicely as a result.

    • Johnny Moneyseed
      October 24, 2013

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      Woahh! You’re back?! I was wondering if you were every coming out of blogger retirement ;)

      I’m looking forward to being move invested into P2P lending. The real returns don’t really happen until you start accumulating a bunch of notes. I’m pretty happy with the almost 5% returns I’ve received in such a short period though. You seriously can’t beat it.

      • writing2reality
        October 24, 2013

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        I’ve always been around, lurking mostly without commenting. But I should be good to keep my posting pretty regularly now that I’m past a pretty crazy stage in life.

        And keep on pounding that money into the account so that snowball of payments can really start accelerating and begin building on itself.

  3. Micro
    October 24, 2013

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    I’ve got my own account slowly going along with Lending Club. I’m hoping to have 100 notes set up before the end of the year. Then I can let that portfolio progress to maturity and get a good picture of what the returns look like once defaults are factored in. Of course, I’m aiming a bit on the riskier end going for grade C-F grade loans.

    • Johnny Moneyseed
      October 24, 2013

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      I’m definitely going to be moving toward the higher risk loans as they become available. There are occasional Bs and Cs, but the big investors jump on the Ds and higher pretty quickly.

      They have a feature that allows you to auto-invest every time a particular quality loan enters the marketplace, but I’d prefer to invest manually when you’re dealing with people who have had credit issues, bankruptcies, etc.

  4. Brian
    October 28, 2013

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    I actually just started my lending club account as well. Working in the finance industry, I actually spend a decent amount of time working on portfolio theory, some white papers on that, etc. Lending club is a fun real-time experiment for me.

    When it comes to alternative investments, I’m always looking for an inefficient market to exploit. P2P lending is already becoming dominated by hedge funds and institutional money, which is crazy, so it won’t be an “inefficient” market for much longer. Already time to keep an eye out for the next new thing.

    • Johnny Moneyseed
      October 28, 2013

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      Yeah it would be nice if they made changes to the P2P guidelines to make it a more lucrative option for small-time investors (ie not hedge funds).

  5. Mark H
    October 31, 2013

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    I was in prosper in the pre SEC era. It was interesting for sure but there was a lot of defaults even in A’s. I didn’t go that far in since at the time my savings account was 5% which meant you needed to go potentially C or more to clear anything. Out of 20 I went in on my only 2 high risk followed completely through and I had some defaults among the highest credit score A folks. I basically got my initial money out minus a few dollars.

    Hopefully they have gotten a bit better under the new rules and with the payout rates vs current savings rates would probably be a much better deal.

    I remember my sister went in to borrow and bidded a really low interest rate and got politely told no one was going to invest and left in a huff. She expected it to be an angel loan site I guess.

    • Johnny Moneyseed
      October 31, 2013

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      Mark — You need to build up a portfolio of about $10,000 worth of $25 notes for you to see the kind of returns they project. Very few loans are charged off, or left unpaid. It’s super shitty when it actually happens to you though!

      Here’s some more data on this:

      http://www.prosper.com/invest/performance.aspx

  6. Refinerr
    January 30, 2014

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    Have you checked out Mosaic solar investments? https://joinmosaic.com/ I believe I found them based on an article at mymoneyblog.com. If you’re interested in green investing and don’t mind the return less the 1% fee. I haven’t tried them because I have a higher risk appetite and would prefer a higher return but could be good for someone else!

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