P2P Investing Strategies

Many people often ask me about the algorithm I have created for selecting peer to peer loans and how it can be used in P2P investing strategies. Some of them seem to confuse an algorithm with a strategy. These are two very different things, as I will explain in this post.

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An algorithm is simply a mathematical equation which can be used to assist in making investments. It is purely objective, as reflected by the fact that the result is a numerical rating assigned to each loan available to investors. However, a strategy is a plan that involves subjective thinking and will vary from one investor to another. A strategy has goals and can be assessed as to whether or not it is successful based on those goals.

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So, if you are wondering whether to use an algorithm or a strategy, the answer is to use both. The strategy will be the overall plan by which you manage your portfolio and the algorithm will help you select specific loans to buy. Using these two tools in tandem will help you build a profitable investment portfolio.

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There is no magic formula for developing successful P2P lending investing strategies. This is because every investor is different. The differences include:

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1) How much money they have to invest

2) How worried they are about losing it all or seeing short term loses

3) How comfortable they are with high interest and lower grade loans

4) How long they want to invest for

5)  Whether they need immediate income or are willing to let their investment grow untouched for many years

6) Other investment opportunities that they may have

7) How willing they are to manage their own investments or the need to have someone else do it

8) What portion of their total portfolio they are willing to put into peer to peer lending

9) How their portfolio is allocated among multiple asset categories

10) Their personal outlook and feelings about the economy, stock market and interest rates

 

The first thing you need to know when developing your strategy is the historical (and likely future) returns from peer to peer lending. Complete return data for all grades and years can be found on the lending club site. This information is presented in a dynamic chart which you can manipulate to view any grade or period you wish to see. In general, we see a total return across all grades within the past 5 years of a little over 5%. Our analysis has shown the highest returns to be around 9%. But the number of investors with returns over 7% is very small. Also, some investors have actually lost money. But the bottom line is that, with some careful loan selection, you should be able to earn 5%. If you have expertise in this area and are willing to invest in riskier loans, then you might be able to earn 7% or more.

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You will need to determine how much of your portfolio to use for P2P investing, and which other investments you will liquidate in order to fund these loans. Also, you should recognize that these are a bunch of small long term investments of up to 5 years. You will receive principal and interest payments so you will need to decide if you want to withdrawal that money or reinvest it.

 

As noted above, there are many other considerations that you should be aware of. Each of these will need to be part of your analysis of this investment opportunity, and ultimately, your P2P lending strategy.