Friday, June 20, 2008

Planning to Prosper

It has been quite some time since I wrote about Prosper loans. Prosper, like many sites now available, is a site where peers can lend to other peers. Prosper effectively removes the banks from the transaction and that is the value that they are selling.

The upside for the borrower is a lower interest rate than would be possible through a conventional loan. This is ultimately where I think that the average lender is starting to get screwed. I don't blame prosper here. As a borrower, it is enticing to see that you have a chance to make serious money in double digit percentage rates on a loan when your high-yield savings account is yielding only 2 or 3 percent.

The upside for the lender is supposed to be a higher interest rate and therefore more income per dollar invested. However, it is easy for the average investor to consider returns without considering some of the more fundamental concepts of Modern Portfolio Theory.

Risk and reward are related, even within the Prosperous world of peer to peer lending. To their credit, Prosper has improved their site by adding in calculators that help users understand the total return for their investment. But the loans are still bid up, and bid up quickly. As with most investments, these things are personal.

Plan for reality with prosper though. My experience shows that even with serious scrutiny, these loans are often not worth the paper they're written on. Twice I've seen serious delinquencies and sometimes they are paid off dramatically before the due date. While I am thrilled that this helps people get out of debt, it can seriously eat into your returns.

As for me, my hand at picking decent loans has not been great and I would prefer to put future investment dollars into a more traditional form of investing. My words of advice would be simply to beware of the idea of diversification through multiple loans. The reality is that all of these loans are dependent on the economy generating income producing jobs for these borrowers to work at and make the money to repay them. Let's face it, if they had the money, they wouldn't need the loan! From that perspective, multiple prosper loans is not really diversified.

Sunday, June 15, 2008

Buy it With Cash Now

I read this article about inflation recently. In a nutshell, inflation is a serious concern at this point. And we're not talking about that wonderful 'special' inflation that excludes the cost of food and energy. This type of inflation is absolutely ridiculous because for most families, the inflation on those two items alone is what is effecting their heating, transportation, and food costs.

This is not an article about inflation measurement. I think that everyone needs to accept the fact that prices have gone up significantly in a short period of time for the average US citizen. For the average person, this can be a difficult situation to deal with. So, I'd like to describe some anti-inflation strategies. Some of these were talked about this morning on Consuelo Mack: Wealthtrack as a means to describe anti-risk investments.

The first basic idea is simple: If you know that the value of the dollar is declining and/or prices are rising, spend the dollars quickly before they lose value. Granted, you don't take this to extremes, but on a practical level, if you plan to do certain projects in the near term anyway, you might be able to lock in prices by going through with your purchase earlier.

The second idea is to evalute your liquid cash and where you're keeping it. Many different options exist for what is considered 'safe' money. When inflation is high, the value lost over time is really tangible. Therefore, investing in different types of 'safe' money is even more appealing to the average person.

The third major concept is an idea that Suze Orman recently revisited on her show: the emergency fund. Frequently, financial writers and experts tout a three to six month emergency fund. Now Suze recommends a 12 month emergency fund. Although I think that this is somewhat a reaction to the issues with the economy, inflation definitely seems to indicate this might not be a bad idea. If you expect the value of savings could decrease over time, it makes sense to have more in order to have the same level of security that you're accustomed to.

Sunday, June 08, 2008

Loan Payoff

Well, with a recent windfall, it was possible to retire a significant bill which was costing about 250 minimum in cash flow each month. However, this was a bill that was being paid extra on, so strictly speaking, this is more like a 500 dollar increase in monthly cash flow. Getting debts paid off is really great for three reasons. The first reason is the increase in cash flow.
The second reason it is great to pay off debts is the emotional feeling. In reality, the debtor really is a slave to the lender. And I know that people will feel that this is a somewhat dramatic stance to take, but I feel like it is true. Each time I pay off a debt, I feel more and more free.
Finally, the great thing about paying things off is knowing that it is over. In a strange way, finishing a debt is like crossing the finish line on a long race. And when extra income comes in, it is like a windfall, a burst of energy that cannot be missed.