The other day I checked into my Lending Club account and noticed something strange. Not only was this thing strange but it was something I have not seen before. My net annualized return on investment had a minus sign in front of it! After perusing my investment notes I realized that one of my 3 notes that was hanging over me like the sword of Damocles has finally gone into default.
Boy was I relieved!
Not only can I move on from that note but now you can benefit from my mistakes by avoiding them yourself!
Imagine checking into your investment account daily and seeing this ROI(return on investment) number that is significantly higher than the experts. You start researching because you wonder if you are doing it wrong. Ultimately you don’t find anything and you assume that you are doing something right and they must be ultra conservative.
Then you notice the investment that you felt was the most sound is in its grace period meaning it is late but it is in that buffer zone not considered late. No biggie since this happens all the time and this borrower has the best credit rating you have seen. Then you notice they are late…one month…two months…three months. Don’t forget, you are checking this daily! Sometime after the first month you decide to sell this note at a small loss, then a larger loss, with no success. Finally it goes into default, your ROI tanks, and you are relieved!
“Don’t sweat the losses. Learn from them, move on and rebuild! This is the path to success.”
You see when you start getting into something like Peer to Peer investing you have to expect that at some point someone will default. This is why the bank hedges their bets and applies interest rates based on borrowers credit history, employment, debt to income ratio, among other metrics. This is also why I have developed a research and investment strategy for notes. Which is where my painful lesson can help you.
Below are five pearls of wisdom, derived from stupidity, that you should consider when investing. You can even apply them in many aspects of life:
1. Do not put all your eggs in one (or 3 baskets). In the investing world this is called diversification. When purchasing my first 8 notes 2 of them were about 10% of my initial investment and one of them was almost 50%. 2 of the 3 are still paying but if one of these notes goes into default (especially the 50%) then it will be a lot harder to recover from.
2. Do not assume what you can not control. The mistake here was that I anticipated that you can sell notes relatively quickly. I tried selling all 3 notes when I realized my investing mistake but nobody was buying. All 3 had a really small markup but they also were all current at the time. Now I have the 2 left and I will keep trying to sell so that I can diversify further.
3. Metrics don’t always show the whole picture. I found that credit score means everything, and nothing all at once. Just because someone has an awesome credit score, and they are borrowing for legitimate reasons, they can pay or default just like the rest of them. So if you apply #1 you will be better off should something happen.
4. Once you find you are at a loss, don’t let that loss bring you down further. When a note defaults there is nothing you can do. The note is no longer able to be sold therefore cut your losses, do a quick assessment on what you may have missed(if anything), and move on.
5. Commit, due your due diligence and come up with a strategy, apply and adjust, succeed. When investing in peer to peer lending go in it for the long haul. The only reason I am not sweating this default is because I feel my investment strategy is sound and I will definitely come out ahead in the end.
Please take my mistakes, learn from and avoid them, and start investing comfortably. It is my hope that you learned something useful from this post. Please sign up for my email list below to where you will continue to be provided more additional useful information.