Finance Travels

Our investment performance much stayed even with VTI in July 2010.  It was a huge month of gains and we saw a 6.98% investment performance over the month and I’m pretty happy that we were able to stay so close to our benchmark.

As of right now, our August investment performance is outperforming the index by well over 1%, hopefully that can continue.  It will be even nicer if we can get a gain out of the month.

I just realized that I forgot to report our June investment comparison report…

June was the first month that our investment portfolio beat our benchmark of VTI.  Unfortunately, it was a very down market and we lost 4.13% in value throughout the month, but that was better than VTI’s performance of -6.29%.

Our Roth IRAs lost 8.21% over the month of May, which lagged our comparison index by .36%.  May was the first month that we trailed VTI by less than one percent.

We are again actively contributing to our Roth IRAs and will likely be making some stock purchases again in July.

Once again, we trailed our index investment comparison tool of VTI by more than 1%.  In April, we gained 1.03% over the month, while VTI gained 2.15%, meaning we trailed the index by 1.12%.  This number is nearly identical to our March performance of trailing VTI by 1.16%.

In June, I suspect that we’ll begin contributing to our Roth IRA again, which means that we need to take a good look at our investment performance.  I believe that we’ll start out by investing in several shares of Berkshire Hathaway, which is fund that I’ve been very interested in joining for years, but haven’t been able to until their split.  Over the past 5 months, Berkshire Hathaway has significantly outperformed VTI, and I’m hoping that trend continues.  Following the old creed of “If you can’t beat them, join them”, I may also put some money in VTI directly.

As I mentioned in February, I am going to begin tracking my investment portfolio and comparing it to a benchmark index stock so that I can determine how my investments are performing.  For now, I’m only going to track our holdings in our Roth IRAs.  The stock that I’m going to use as my benchmark is the Vanguard Total Stock Market ETF (VTI), as I feel that this gives a good snapshot of the entire stock market.

Before going any further, I have to thank the 2Million Personal Finance Blog for giving me the idea and methodology.

Our positions in these accounts was $38,340 on March 1st and by March 31st, they had grown to $39,760 which is a 4.82% increase over the month (unfortunately I forgot to take a screen shot and save it on the 31st, so I’ll start doing that with next month’s report).  VTI gained 5.98% over the same time period, which means that I underperformed the market by 1.16%.

My plan is to watch these numbers over the next three months and then begin to make adjustments to my positions if the under performance trend continues.

As you may or may not now, I started an experiment with micro lender Prosper.com in March, 2006, about three months after Prosper opened to the public.  Prosper billed itself as a site where folks could perform peer-to-peer lending – folks looking for money would post a listing on the the site, and folks like me would fill the loan one at a time until the loan was completely filled.  The interest rate was calculated on the borrower’s credit score, debt levels, etc… and was bid down by lenders once a loan was fulfilled.

Between March 2006 and May 2007, I deposited $1,580 into my Prosper account.  I placed successful bids on a total of 51 loans.  In most cases, I funded a loan for $50, as I felt this was an acceptable amount of risk on each loan, and I wanted to reduce my risk by funding as many loans as I could.

Here is a breakdown of how the 51 loans performed (to date):

• Charge-Offs – 12 (23.5%) notes -I didn’t receive full payment in these loans and Prosper has written them off.  I basically won’t get any payments beyond what I’ve already received on these loans.  Prosper does not do a good job of telling you why these loans have been charged off other than they haven’t received payment in 4+ months or the borrower has declared bankruptcy.  Of these 12 loans, I actually did make money on 3 of them (borrower defaulted after I received more than their loan amount in principle+interest).
• Paid – 28 (54.9%) – Over half of the notes I funded were paid in full.  These loans ranged from 8% to 26% interest.  My best case loan (the 26% interest) netted me about $20 in the course of its life.
• Active – 11 (21.5%) – I still have 11 active notes.  Of these, the last is due to be paid in September 2011.

In July of 2007, it became clear to me that Prosper was having some serious financial issues.  I had been following several forums dedicated to discussing borrowing & lending from Prosper.com and many of the “big players” were expressing concern, experiencing extremely high charge-offs, etc…  It was at this point that I decided to bow out and began systematically withdrawing money from my Prosper account as it became available.  It was a good thing that I did, because in October of 2008, the SEC mandated that Prosper no longer fill loan requests until further action was taken (Prosper “reopened” in 2009, but at a much lower activity level than they had been functioning at).

To date, I have managed to withdraw $1,591 from my Prosper account.  I still have loans worth $124 sitting within the system, so assuming no more defaults, I should be able to withdraw at least $1,715.  This represents $135 (8.5% over 5+ years) more than what I had deposited into Prosper.

So was it a success?  I guess it depends on what you mean by success.  I didn’t actually lose money (and a lot of people did), so that’s always good.  However, I could have made the same amount by opening a CD at 1.75% and letting it sit risk free for 5 years.

This has been an interesting experiment, and it was kind of fun picking and choosing loans to fund.  Apparently, I did do an above average job picking loans, as Fred93 reports that 45.3% of Prosper’s loans have gone bad.  I’m glad that I was smart enough to recognize the warning signs early and pulled out of the marketplace when I did.  From here on out, I’ll leave the loan funding to the pros

Finally, from what I have read, it appears as though Prosper is pretty much on the verge of bankruptcy.  I’m not sure what this will mean to the money that I still have in the system.

We’ve decided to do things differently…

We’re saying NO to loans…

We’ve felt that we’ve been pretty financially conservative.  We’ve always lived well within our means, only have carried a credit card balance for maybe three months in the ten years that we’ve been married, and have generally been “good citizens” with the financial assets that we have.

However, we haven’t been feeling as though we’re making the progress that we need to in order to send our 3 kids to college and still retire at a decent age.  That’s why we’ve decided to switch things up a bit.

I first listened to Dave Ramsey a few months ago, shortly after I had purchased our new vehicle which happened to be equipped with XM Radio which broadcasts his show daily from 3:00 to 6:00 EST.  Other than his political views, which I feel that he throws into the show more often than is needed, I found that in general I agree with his program.  For those that don’t know, Dave is a proponent of what some would call “extreme” fiscal conservativeness.  He advocates getting out of debt (even your home mortgage) and then staying out of it.  That means no credit card loans, no car loans, no ANY loans.  The more I thought about it, the more I liked it.  I ponied up the $10 to buy his Total Money Makeover audio book, listened to it, and decided to give his program a try.

Dave plan is simple, and that’s why it works.  He has identified seven steps that one must take to achieve financial well-being:

Fortunately, we feel as though we are in a very good position to start the program.  With no credit card debt, and just $5,000 remaining on our car loan, we should be onto step 3 before the end of the 2009 (I could immediately pay off the car loan if I were to jump into our emergency fund, but that’s not something I’m comfortable with).

We sat down and established this short term timeline:

End of August 2009 – Have $3,000 on hand for connection to the water authority’s water line.  As mentioned in previous posts, we are being forced to connect to “city” water this summer.  This (unneeded but forced) expense will set us back in the plan by at least 1.5 months.  The water authority still has not given us a date as to when the bill is due, but considering they tore up my neighbor’s yard yesterday to lay down about thirty feet of pipe, I’m sure that it is sooner rather than later.

End of 2009 – Completed paying off the remaining $5,000 on the Hyundai Elantra loan.  This will give us two clear titled vehicles with under 100K miles.  The van will be the next one to replace, hopefully we are able to push that beyond 2012.

End of 1st Quarter 2010 –   At this point, I’m hoping that we will have increased our emergency fund by $9,000, giving us a total of $20,000.  We believe this total will give us 5 to 6 months of living expenses should one of us lose our jobs.

2nd Quarter 2010+ – At this point, we should be able to increase our retirement funding to 15% as well as schedule more regular college contributions.  Once we get into this step a bit further, I’ll be able to determine at what levels we can do this effectively.  We will also revisit what (if anything) we could do to pay the home off early.  While this certainly sounds appealing and I think we could definitely make headway, I want to see how the next six months pan out before we commit to anything.

Ongoing – Reduce credit card usage and do all that we can to reduce spending.  Ramsey’s plan includes shredding all credit cards and thus removing one’s ability to go into debt even if they wanted to.  However, I think that we’ve proven ourselves to be responsible with credit cards and the bonuses that they offer still make them worthwhile (for instance, just last month we received $100 in free gas just for using the credit card at particular stations).  That being said, I have committed to using our debit card for most purchases, which I believe will help decrease some of the non-essential spending that I may have been guilty of in the past.  We are currently in the process of moving the majority of our purchases from credit card to debit card and our next credit card bill should be the first in months (if not years), that I’ll have a sub-$1,000 bill.

So that’s the plan.  Please leave some comments if you’ve gone through a similiar process or think we are nuts!  I’m hoping that a side-effect of this plan will be increased postings to this site to document our progress.

I posted several times about my success/failure with Prosper.com.  For those that don’t know, Prosper is a micro-lending site.  People list loans requests and they get filled by “the community” based upon the loaner’s credentials, story, etc.  The company is currently in a “holding period” with the SEC and may or may not get approval to continue business in the future.

I had great hopes in the company and at one point had about $1,200 in Prosper loans.  The interest rates I was getting on the loans was anywhere between 10 and 15 percent.  I played it fairly conservatively, usually bidding only on listings for people with a high(er) credit score.

I had successfully bid on 51 loans.  Most of those bids were for $50, but there were some between $50-$100.

As of today, 21 loans are current, 18 have been paid in full, and 12 are either charged-off or delinquent.  These unpaid loans represent about $275.

To make matters even worse, this data from Fred93′s Blog shows that Prosper’s unpaid loan rate is hovering around 38-42%:

Click on image for full size

Fred93′s blog goes into great detail on these numbers, so I’m not going to rehash them here.  But in short, they suck.

I still have about $600 in the system and I’m pulling it out of Prosper as fast as I can.

So would I recommend Prosper.com to the casual investor?  Hell no. It was an interesting experiment and that is all.  Fortunately, I didn’t have a whole lot of cash tied up in this thing.  There were a lot of people that lost a heck of a lot more money than I did.  Many of their stories can be found at Prospers.org.

I just received the following email from Prosper:

We are writing to inform you that we have made the decision to discontinue accepting new lender registrations, and new bids from existing lenders, from residents from the Commonwealth of Pennsylvania. Our decision to make this change was based on our ongoing discussions with regulators in Pennsylvania, which led us to believe the change was necessary to comply with their current interpretation of their state regulations.

You will continue with your existing lender agreements, have your existing loans serviced, and be able to transfer funds out of your Prosper account. However, you will not be able to place new bids on listings or transfer money into your Prosper account.

This change does not affect borrowers residing in Pennsylvania, who remain free to create loan listings on Prosper.

We apologize for any inconvenience this change may have caused.

We thank you for being a member of the Prosper community. We hope to make Prosper available to lenders in Pennsylvania again soon.

Regards,
Prosper

Well, my decision whether or not to continue investing in Prosper just got a whole lot easier.  The vaugeness of the letter tells me that it was illegal for Prosper to operate in PA from the start and are just now getting called on it.

I had actually been doing fairly well on my Prosper portfolio, but I haven’t put any new money into it for at least a year.

I receive daily emails from my brokerage telling me how much I gained or lost that day in my IRA accounts.  I always thought it would be a special day when one of those accounts gained more than $1,000 for a day.  Well, that day finally happened yesterday.  Unfortunately, the previous 5-days have been a major beat-down on my portfolio and yesterday’s gain puts me no where near where I was at the beginning of the month…

Oh well, such is the market.  It was a good day regardless.