Dec 232019
 

Learning from my past mistakes

As a peer to peer investor, when no one else is around I would find myself a loan. 😀

I’ve been investing with Lending Loop (LL) for over 3 years now. My first year in 2017 ended with a 10% return net of expenses. Then last year I made 11%. But in the meantime I was accumulating an unhealthy amount of delinquent loans in my portfolio. This hidden risk was not good.

So at the start of 2019 I decided to adopt a more strategic approach to choosing loans. I came up with the 10 Rules for Choosing Better Loans, which you can find here. New defaults have been in decline since I started using this more selective method. 🙂

In today’s post I’ll dive into my portfolio’s 2019 performance and explain my plans moving forward with this platform, including withdrawing my money.

LL as a platform has come a long way over the years. It hit a major milestone in 2017 when it helped fund over $10 million in total loans. By the summer of 2018 it had surpassed $20 million. And by the end of this year, over $60 million. Tighter lending restriction at traditional banks is pushing businesses to find alternative lending sources.

But with Canadian delinquencies on the rise, and higher expected inflation in 2020, it remains to be seen how LL lenders will do in the foreseeable future. There are also internal issues with the platform which I’ve blogged about in the past that have not been fixed.

In today’s post I’ll be going over the following:

  • Breakdown of my 2019 return.
  • My increasing number of loans in default.
  • Recent changes to the platform.
  • What I liked and didn’t like.
  • My plans for Lending Loop in 2020.

For a general overview of how Lending Loop works, its pros and cons, and whether it’s right for you, please see my original review.

Liquid’s 2019 Portfolio Performance 

Assuming all the scheduled payments over the next week are made on time, I will earn a total of $4,135 of interest in 2019. Luckily there were no loans written off this year.

2019 Earnings

  • Interest earned   $4,135
  • Servicing fees       -$443
  • Bonuses                    $87
  • —————————-
  • Net earnings    $3,779

Altogether my income for 2019 is $3,779 net of fees. By comparison last year I earned $3,369 net. So things are going in the right direction.

I began 2019 with $33,563 in my account. By the end of the year I’ll have $37,205. So my annual return is 11%. 🙂 Not too shabby. Despite using a more conservative approach choosing loans this year, the return ended up being about the same as in 2018. The new companies I’ve been lending to appear to be more diligent paying on time. 🙂 Here’s a snapshot of my current dashboard.

And here is my total earnings summary.

I’ve contributed a total of $28,000 into this platform, and it has made me over $9,100 of profit so far. 🙂 In the graph below, the difference between the purple and grey lines is my net earnings. It’s really satisfying to see a portfolio growing by itself. 😀

On the surface everything looks pretty rosy. But the devils are in the details. Behind the headline 11% annual return hides a slough of bad loans. Since there is no secondary market for Lending Loop loans, investors are often left holding toxic debt that are still marked at their original value, but are actually worth much less.

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Jul 252019
 

The Canadian federal election is coming up soon. And after that the U.S. presidential race will be in full swing for the 2020 election. Will the incumbent Donald Trump stay for another 4 years? It’s hard to make that call at this point. But perhaps there are some investment opportunities we can look at in the meantime.

Unfortunately the financial market as a whole isn’t particularly attractive right now. The S&P 500 currently has an Earnings Yield (EY) of just 4.45%. So if we put money in a stock market index fund today, we will likely receive an annual return of 4.45% based on corporate earnings, and assuming all other factors stay the same. This is noticeably lower than the long term average EY of 7.35%. Although 4.45% isn’t the worst return you can get, after paying maybe 1% of that in tax, and losing another 2% to inflation, the net real return on investment would be less than 1.5%.

That’s why I’ve decided to be more selective about which assets to buy. One thing you can always count on during an election is uncertainty. The market hates that word. One whiff of uncertainty and investors leave the stock market faster than a guy after hearing the results of the pregnancy test. This upcoming election comes at a time when the U.S. economy is slowing due to record amounts of debt weighing it down. According to the New York Fed, household debt increased for 19 quarters in a row, and is now nearly $1 trillion above the previous peak. Student loans have doubled since 2006 as a percentage of GDP. This will most likely lead to interest rate cuts in the United States to help bolster the economy. And my assumption is that the Bank of Canada will take similar action soon after, as it often did in the past. Lower interest rates usually boosts the stock market and commodity prices.

So for the next 6 to 18 months, I think the best asset classes to be in are bonds, prime real estate, and precious metals. Long term bond funds are highly sensitive to interest rate changes. But as long as we’re quite confident that rates aren’t moving up, then bond funds should provide a low risk option to earn some interest income, with the added potential for capital gains if the price of borrowing become cheaper.

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Mar 122019
 

Lending Loop Update

I’ve been investing with Lending Loop for over 2 years now. My first year in 2017 was better than expected, ending with a 10% return net of expenses. I was only expecting an 8% return. In today’s post I’ll dive into my 2018 performance with Lending Loop and also explain how the site has changed over the last year.

 

Liquid’s 2018 Portfolio Performance (11% return)

My 2018 average loan interest rate after fees was 12.7%. A loan write-off shaved away 0.7%. And a bunch of delayed payments costed me another 1%. Which means my actual net return came out to be 11%, or $3,369. Score! 😀 I started 2018 with $30,400 in my account, and the end of year balance grew to $33,700.

Here is my 2018 earnings statement.

Income

  • Interest earned   $3,968
  • Servicing fees       -$421
  • Bonuses                    $25
  • —————————-
  • Total earnings    $3,572

Loan Losses

  • Principal defaulted    $204
  • Principal recovered       -$1
  • —————————
  • Total charged-off       $203

Unfortunately I did have one loan write-off in 2018. But it was a relatively small loss of $203. The borrower, a street sweeping business, owed significantly more taxes to the CRA than the value of its assets. The CRA would naturally have priority over other creditors in any bankruptcy or insolvency proceedings. This was the first loan write off in my portfolio, but it likely won’t be the last.

 

Portfolio at a Glance

Here are some quick stats about my Lending Loop portfolio.

  • I have made 87 loans in total over 25 months.
    • 18 of those loans have been paid off in full. Hurray!
    • 1 has defaulted, and I lost 81% or ($203) of my principal on this loan.
    • 68 loans remain ongoing for now. 60 of these have no major problems, but 8 are either delinquent or in default.

As of this week in March 2019, I’ve made a lifetime earnings of $6,300 from Lending Loop. 🙂

As with dividend or real estate investing, having patience is a key element to the fixed income game. Due to compound interest, my total lifetime earnings should hit $10,000 by this time next year, assuming portfolio performance remains consistent. 🙂

In terms of what types of loan I hold, they’re mainly B and C+ grades, which has an expected yield range of 10% to 13% after fees. This mixture hasn’t changed much for me over time. Most of the loans I participate in have a 3 to 4 year term.

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Oct 292018
 

Short Term VS Long Term Bond Funds

Earlier this year I put together a list of high quality bond funds for readers to check out. There was a lot of good feedback, but some people questioned why I didn’t include any short term bond funds in my list. More recently reader Carla also asked about my indifference to them.

Well, to be Frank, I would have to change my name. 😎 But rather than doing that I will answer Carla’s question. 🙂

Retirement portfolios are usually associated with long term planning. Short term bonds tend to be less volatile and less sensitive to interest rate movements. But since I don’t plan to sell any time soon, short term volatility doesn’t really affect my bottom line. On the other hand, long term bonds pay a higher interest rate (or coupon) which more than compensates for the higher volatility in the long run. For evidence of this, let’s compare 2 bond funds with different durations.

Comparing Returns of ZCS and ZLC

For consistency purposes we’ll isolate the duration variable and look at the following 2 funds.

  • BMO Short Bond ETF (ZCS)
  • BMO Long Bond ETF (ZLC)

Both funds are from the same company, and hold corporate bonds. The only key difference is the duration of bonds they hold. Below shows the annual total return of these funds from Morningstar, highlighted in yellow.

bond fund comparison between short and long

As we can see, over the last 5 years the short term bond index fund (ZCS) returned only 2.21% per year. The latest inflation rate number from Statistics Canada is 2.2%. So holding a short term bond fund such as ZCS would have earned an annual real return of 0.01%. I think we can all do better than that. 🙂

Meanwhile the long term bond fund (ZLC) returned 6.21% per year on average. Even the 1 year return shows that long term bond fund ZLC came out ahead. Keep in mind this is during a rising interest rate environment, which should hurt long bond funds more. But short bond fund ZCS currently has a weighted average coupon of only 2.91%, while ZLC’s is at 5.29%. The longer investment time horizon we have, the bigger the difference in returns we should see between ZLC and ZCS. 🙂

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Jan 222018
 

Why Bonds Are So Important

A fundamental skill to successfully managing wealth is knowing how to diversify our assets. This means we must own both equity and fixed income, with the correct weighting and balance. There isn’t a single solution that fits everyone’s situation. But in general bonds help to protect our wealth against volatility when the stock market goes crazy, which it tends to do once in awhile.

Some kind of mix between safe assets such as bonds, and growth assets such as stocks, has proven to work very well in good economic times and bad. For example, a mix of 80% stocks and 20% bonds in a diversified portfolio would have returned about 8% on average over the past decade, which is not bad since that includes the stock market crash of the 2008 financial crisis.

Financial problems are often cited as the number one reason for divorce. But having some solid bond exposure can bring stability to a relationship. It’s clear that couples are more likely to stay together if they have strong bonds. 😎

The Best Bond Exchange Traded Funds

So what’s the best way to buy bonds? Personally I like to invest in bond ETFs, which hold individual bonds so I stay diversified within this asset class. The following funds are the best Canadian bond ETFs to buy for investors looking at a medium or long term time horizon. I’m no expert but these funds are the best in their categories that I can find. 🙂

  • BMO Aggregate Bond Index ETF (ZAG) 
    A broad index fund that holds both government and corporate bonds. Very diversified.
  • BMO Mid Corporate Bond ETF (ZCM)
    An index fund that holds only corporate bonds with maturities between 5 to 10 years.
  • iShares Canadian HYBrid Corporate Bond Index ETF (XHB)
    Holds lower quality corporate bonds (Mostly BBB rated) with a minimum maturity of 1 year.
  • Horizons Active Corporate Bond ETF (HAB)
    Actively managed corporate bond fund that seeks moderate capital growth and generate high income.
  • BMO Long Corporate Bond Index ETF (ZLC)
    An index fund that holds only corporate bonds with maturities over 10 years.

Here’s a table so you can easily compare all of them. 🙂

Comparing Bond ETFsZAGZCMXHBHABZLC
Price/unit on Jan 2018$15$16$20$11$18
Gov’t / Corporate %72 / 280 / 1000/ 1000 / 1000 / 100
Net Assets (billions)$3.4$1.4$0.5$0.6$0.4
MER (fees)0.14%0.34%0.51%0.60%0.34%
Weighted Avg duration7.5 years6.3 years5.9 years6.2 years13.3 years
Annual yield3.00%3.10%4.00%3.10%4.10%
Avg YTM2.50%3.30%4.00%3.20%3.90%
% Credit AAA410020
% Credit AA3213051
% Credit A173303861
% Credit BBB1054805138
% Credit BB or Lower002000
1 year total return1.5%1.2%3.3%2.6%5.9%
3 year avg return1.4%2.3%3.3%2.5%3.4%
5 year avg return2.7%3.6%3.9%3.2%5.1%
Additional informationMorningstar: 4

Federal 37%
Provincial 35%
Corporate 28%
.
.

Avg coupon: 3.2

$6,300 to DRIP

Morningstar: 5

Energy 31%
Financial 26%
Real estate 12%
Commun 12%
Other 19%

Avg coupon: 3.5

$6,300 to DRIP

Morningstar: 3

Energy 30%
Commun 23%
Industrial 17%
Financial 13%
Other 17%

Avg coupon: 4.7

$6,200 to DRIP

Morningstar: 5

Financial 43%
Energy 18%
Infrast 16%
Commun 10%
Other 13%

Avg coupon: 4.0

$4,200 to DRIP

Morningstar: 5

Infrast 43%
Energy 33%
Commun 10%
Financial 7%
Other 7%

Avg coupon: 5.4

$5,600 to DRIP

 

  • The Average duration refers to how sensitive the ETF is to changing interest rates. Longer duration bonds offer higher yields, but are also more sensitive to interest rate movements.
  • The weighted average yield to maturity (YTM) includes the interest payments and any capital gain or loss that the investor will realize by holding the bonds to maturity.
  • The Credit rating is how risky a bond is. The lower the rating, the more likely the company is to default on its debt obligations.

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