For the last several months I have been investing on the Prosper platform. This month marks the first time the cumulative sum of payments (both interest and principal) have reached the minimum amount necessary to reinvest in a new debt note: $25.00.
While this isn’t that much it is a good result given the small amount of money I’ve invested, and the relatively short amount of time it has been growing.
Currently I hold 27 notes with a total average annualized return of 7.7% – very near the top of the historical average return of the S&P 500. That’s pretty good!
I bought my first note in December of 2015 and have been regularly buying new notes on a more or less monthly basis.
While personal debt can be a riskier investment than stocks and bonds (which I also hold), I like that I can even out the rough patches in my portfolio with this more or less guaranteed income.
The big question is, what happens when someone defaults? Obviously a default could be a major hit to my debt portfolion, but I have attempted to well diversify it. How? By owning just fractional pieces of any one loan, spread across a wide range of risk categories.
Prosper allows you to buy debt notes for $25 each, and in one of seven general risk categories (that themselves are divided into 11 sub-categories of general risk assessment).
When I invest I purchase no more than $25 of any single loan. I also try and hold a ratio of two debt notes in the lowest risk category (AA) for any one in any higher risk category, and keep all higher risk categories even in holdings. So if I have 10 AA notes, I should have 5 in A, 5 in, B 5 in C, etc.
In this manner I can gain exposure to higher risk loans which pay a higher percentage return, but keep my portfolio insulated against defaults – both by any one loan or category of loans.
Today was a good day.