Can social lending lead a path to financial freedom?

The title of this post is an intriguing question that I saw posted in a discussion group I’m involved in. It’s definitely intriguing because social lending is currently both very accessible for small scale investors and offers much bigger returns (theoretically) than many other investments. This would make it a perfect investment for a quick path to financial independence, would it not? Reality, as always, is a bit more complicated.

What is necessary for FI?

There are two paths for reaching financial freedom. Either you have large enough assets that last you until the end of your life or you have enough cash flow to cover your monthly expenses. Social lending in this case would fall under the second path – you have constant monthly inflow of interest payments that you could transfer out of the portal to use for living expenses. If your portfolio is big enough then at some point you could in theory start selling loans off as well to reduce your portfolio, but this is an unlikely solution.

At current rates of return, you would need a social lending portfolio of about 100 000+ euros to earn enough to live off about 1000 euros (net) per month. (provided you have health insurance, otherwise it’s 1,5x the amount). This number is slowly increasing as returns of social lending drop as the industry evolves. (US sites give us a baseline of 7-10% to plan for in terms of the future). For a similar sum of money you wouldn’t be able to create an equal amount of yearly dividends or rental income (unless you leverage heavily against loans). Why don’t more people focus only on social lending then?

Risk level of social lending

One of the core truths of investing is that higher returns are intrinsically tied to higher levels of risk. This means that while you can enjoy high returns you must be ready to take significant losses as well. In terms of social lending this means that in case of a recession or any other significant economic drop you would potentially lose a lot of your projected monthly cash flow – I wouldn’t be surprised if the drop in payments was something close to half of what is expected. This would give you two options – either dip into the principal amount of your loans to cover your expenses or live off significantly less until recovery kicks in.

Most social lending sites have not gone through a severe recession – the US example only gives us a baseline that’s mixed with the newness of the industry from 2009, meaning it’s hard to project those numbers to the current economic climate. This means that the drop could be far steeper or less steep than expected, however it’s generally best to be prepared for anything when it comes to financial planning.

Managing risks

The reason why most financial gurus and bloggers talk about at least three different asset classes (though they may be very strongly focused on just one), is because it’s a way of balancing out risks. In the case of an economic downfall not all asset classes drop or recover in the same way. If you think of people losing their jobs then the first thing to drop is the commodities market because people start to cut back their expenses. Then it’s a balance between paying off your debts and keeping a roof over your head. People will likely switch to smaller apartments which will influence rental income, and lack of consumer demand will drop stock prices across the board.

This means while one part of the market is already dropping the others will hold steady for a while – the same for recovery. Real estate takes quite long to recover usually, and the same is likely true for loans as well, since bailiffs will take a while to start getting any payments because people will need to find jobs and get their finances back in order. The stock market might go up quickly with euphoria after a severe drop like it did this time around, but recovery might also last years.

For me personally this means that I’m making an effort to diversify my portfolio across different asset classes. While in numbers social lending makes sense in terms of high returns, even I don’t have the risk tolerance to invest only into social lending. Currently Bondora + Moneyzen make up about 60% of my portfolio. Crowdestate, which I would list under real estate (which I know is arguable), is about 10% and the last 30% consists of Baltic stock and SP500 index. In the long run, the value of social lending in my portfolio should slowly start dropping, but it will likely remain at the 50% level for a while.

How long is it OK for Bondora to mess up?

It’s a typical work day morning for me. I read the news, look over some of my favorite sites and generally check Bondora to see what’s been happening. I’m not a particularly nervous investor, I mostly just log on out of habit and to find inspiration for new blog posts. For the pretty much past three weeks my routine has been broken up because Bondora as a site is pretty much broken.

What’s currently very broken

Logging on to site is unreliable at best, completely impossible at worst.

Once you log on, then at best you get to do a few things before some sort of an error pops up.

Some sort of new loan handling process was implemented, which means a lot of money being stuck under bids and a large amount of money bouncing back all the time.

As of this morning the account statement page should be fixed, but since the site is currently offline for me, then not as if I can check :)

Things that have been broken forever

Cash flow page shots absolute nonsense for three years (!!) already. This means you cannot get accurate information about where or how your money is actually moving. The longer you invest, the more useless the cash flow page becomes. Currently it’s off by about 25% for me.

No reasonable data on recovery of defaulted loans in your portfolio overview. This means that unless you want to spend a lot of quality time with Excel then you can’t get a good understanding IF and how your loans are actually recovering.

Dozens of small bugs and quality of life issues for investors such as actually useful pie charts, a better portfolio overview, all the promised additions to the new portfolio manager, the whole trouble with additional claims for remade schedules, broken schedules for some loans, actual answers to ANY of the dozens of questions investors have asked via e-mail or forums. Serious lack of transparency is an issue as well.

What to do?

I’d personally recommend Bondora actually going offline for a full week to make the site actually work. Currently it’s just making investors more and more mad since they get a chance to log on and then everything is still pretty much broken.

My mind boggles at how this is actually possible that such a huge site fails to such an extent at IT development. We are talking about real money – hundreds of thousands of euros that investors cannot access when Bondora messes up their site. Whoever is their IT (or business?) lead, I don’t think they’re doing their job very well at this point. I’m assuming they have competent developers who are capable of understanding the issues, but for some reason they’re forced to make unimportant updates while not actually fixing serious old issues and bugs.

Another issue is how they communicate with investors. It took weeks of complaining and questions until some contact was made, and Tauri from the isepankur blog was asked to gather up ideas from small scale investors – while that’s all cool, then why is there a random person who is doing this, not Bondora itself?

For investors, I recommend – complain away! Publicly! As corporate culture shows, there is nothing better than attention to get things moving. Ideally a bit of bad press would be wonderful here to get the wheels moving, but overall honest complaints from bloggers is a great way to raise awareness on issues that aren’t being fixed!

MoneyZen portfolio, 6 months

If I tried to explain my MoneyZen portfolio in two words then those would be “positively boring”. Compared to the chaos of what’s constantly happening in Bondora, I’d consider that a pretty cool problem to have. While it would be nice if things move a bit more quickly and I could see some more developments happening, slow and steady isn’t actually bad when it comes to investments.

I’ve kept up my strategy of 50€/month, and the current standing looks like this:

6mmoneyzen

As you can see, the interest income is slowly and steadily growing, at this pace it’ll climb to 10€/month soon. Not much, but I like the steady growth that’s happening. By summer the portfolio will reach 500€ and I’ll have to reconsider what I’ll do – if I’ll keep the same pace or maybe slow down for a while to see how the portfolio matures.

6mcontracts

While a while back I had some loans that I was afraid might default, those have actually climbed back up, and are almost on schedule. So, as of now still no defaults and currently only 4 loans are delayed out of the 33 that I have, which does look quite nice. Time will tell how that’ll keep up.

My Bondora portfolio (2015, February)

February is a short month, so generally your returns are a bit smaller than usual. As suspected, February fell a bit short of January’s results but it was overall a good month. Loans still keep going out relatively quickly and the issues of loans bouncing back a lot seems to have been solved a bit, it definitely looks a bit better on charts.

februaryinvestments

February was a landmark month in some ways for my portfolio. The total outstanding principal reached 5000€ finally after 2 years and 3 months. It’s definitely a number that I couldn’t really imagine when I started. The downside being that while recovery is slowly happening, then defaulted loans are growing quickly as well and are likely to hit 500€ next month.

februaryinvestmenttotal

The pace of investments is keeping steady, but growing is becoming challenging. I currently have a bit less side projects running as last year, but in theory the actual pay rise for teachers that was announced 2 months ago might actually happen at some point as well, which means a slight boost for investments.

februaryinterestearned

While the total interest earned for Bondora for February was 90,15€, it was only behind January by about 40 cents. Combine that with the small amount earned from Moneyzen, and next month should break 100€ interest per month as I predicted.

New loans

This month I had the automatic bidder do quite a bit of the work. I only hand picked about 10 loans since I didn’t have much time for it. I did get quite a nice balance of higher credit group loans, so I’m quite happy with it.

newloansfeburary