What Happens When A P2P Borrower Stops Paying?

What Happens When A Prosper P2P Borrower Stops PayingI’ve been an investor with Prosper, a peer-to-peer (P2P) lending company since 2012. I usually check my account once a quarter to view my performance and to re-invest cash that has come in from borrower payments. Per my latest passive income update, the annualized return of all of the notes in my portfolio is 7.41%. Not bad!

With rates expected to rise by perhaps as much as 2% over the next several years, I suspect the returns on P2P lending will also commensurately increase. As a result, I plan to allocate more of my free cash flow into Prosper in $10,000 increments. 

Passive Income Update For Financial Freedom 2016

Financial Samurai Passive Income Update 2015 - 2016 - Leaf On River by Kathy Kettner Creative CommonsIn early 2012, I made it a goal to try and achieve $200,000 a year in passive income by 2H 2015. The idea was to somehow make a large enough sum of money to comfortably provide for a family of three or four in Honolulu or San Francisco. With $200,000 a year, I wouldn’t have to go back to work ever again. Instead, I’d rest easy working on building Financial Samurai into a lifestyle business.

Creating a lifestyle business has always been a dream of mine because it helps mix entrepreneurial passion with the ultimate end goal: living a better life. Killing myself for the next 10 years to try to make something huge in order to live a nice life sounds a little backwards. Why not live a nice life now?

Growing passive to semi-passive income from ~$78,000 in 2012 to $200,000 is a daunting task, especially given our low interest rate environment. But when we write out our goals, I firmly believe we’ll figure out ways to eventually get there. Let’s see if I made it or not!

Why I Left Wall Street To Start A Fintech Company

Mike Furlong, Sliced Investing Co-founderThe following is a guest post by Sliced Investing co-founder, Mike Furlong. Sliced Investing is backed by Y Combinator, Khosla Ventures, TriplePoint Venture Growth, Data Collective, and Carnegie Mellon. I spent this past Spring consulting for them as I found their business objective of providing greater access to hedge funds and alternative investments through crowdsourcing highly intriguing. 

My first job was a rather humbling one. I worked at a country club where I caddied for super rich bankers and traders. They were living the good life most people just dream about. They had tons of money to own fancy cars, top of the line clubs, luxury watches, designer clothes, and me to wait on them.

Meanwhile I was making minimum wage, lugging their 50-pound bags on my back, and trying to keep a constant smile on my face while sweating like crazy in the summer humidity and blinding sun. I tried to be as accommodating as possible and give them suggestions on which clubs to use, but most of the time they did whatever they wanted to without listening to me.

Why Debt Welchers Are Admired

Greek Crisis, Santorini Church

Santorini, Greece

By voting “NO,” the Greek people have rejected austerity measures by the EU in order to receive bailout money to pay off their debts. It’s as if Greece gave a big middle finger to the EU!

It’s great that at least the people were able to vote on their future. You can see the jubilation in their eyes after the results were announced. However, the immediate consequence of the vote is an enormous amount of economic pain as foreign investors pull out, the stock market crashes, banks stop lending, retirement savings get trashed, and unemployment soars even higher. Ah, the sacrifices we make to stay free!

Unfortunately, all of us investors who have nothing to do with Greece will suffer as well. If you haven’t reviewed your asset allocation this year, I highly encourage you to do so today. The US stock market could easily correct by 10% as capital flees riskier asset classes.

The Greek people are not completely to blame for their economic woes. They simply operated in the confines of an inept government that promised too much. Voting for a politician who promises to give you a tax cut or allows you to retire by 50 with a lifetime pension makes logical sense. Who wouldn’t vote for such benefits?

Despite the upcoming difficulties for the Greek, we can look on the bright side. With close to a 200% national debt to GDP ratio, the Greek have been able to live way beyond their means for a very long time. And if you can get a debt haircut when it’s finally time to pay up, then all the better! Surely Portugal, Italy, and Spain are thinking of ways to gain more favorable debt terms with the EU as well. 

Creating A More Defensive Investment Portfolio With Bonds

Defensive Portfolio With BondsWith Greece and Puerto Rico on the brink of bankruptcy, stock market volatility has returned. Even US Treasury bonds have sold off with the 10-year yield moving from 1.7% to 2.4% due to a strengthening labor market and signs of inflationary pressure on the horizon. Usually US bonds rally and yields decline during times of uncertainty.

Due to such headwinds, it’s getting incredibly difficult to make healthy returns in the stock market. We’re going through an adjustment period as we always do when the Fed plans to raise interest rates. Yet, should they raise soon given the unrest abroad? The US Dollar has already strengthened to 1.10 USD:Euro from 1.4 USD:Euro in 2014.

If I were Fed Chair Janet Yellen, I’d wait to raise interest rates until 2016 at the earliest. Europe will hopefully get their act together by then! This post will review my Motif Investing portfolio and discuss what I plan to do next. Feel free to chime in.

Why Invest In Certificates of Deposit (CD) When Rates Are So Low

Porsche 911 Carrera 2013

CDs let me rest easy. Roughly 10% of my net worth is in CDs and other stable instruments currently yielding a blended rate of around 3.5% in 2H 2015. Even with rates so low, if I invest $250,000 at 2.3% I still earn $479 a month, which is a very nice chunk of guaranteed change for someone who no longer works for a living.

There are times when the 10-year yield might be yielding less than a similar duration CD. Look to invest in CDs to take advantage of such a spread. For example, the 10-year bond yield might yield 2.1%, while you can find 7-year CDs yielding 2.3%.

Can Financial Samurai Be The Next Billion Dollar Financial Technology Company?

Financial Samurai LogoDo you know what’s fun and free? Dreaming BIG! As kids, we use to daydream all the time. I fantasized about being a professional tennis player who’d compete in tournaments around the world via a private jet until I realized I couldn’t even make it to All-State, just All-District. It was only until the age of 32 did I start dreaming again.

When Ariana Huffington sold The Huffington Post to AOL for $315 million in 2013, The Smoking Gun, and several other sites reported that Ariana only received $21 million, or ~6.6% from the sale. $21 million isn’t chump change, but that’s a far cry from the original sale price.

Meanwhile, Michael Arrington, founder of TechCrunch sold his site to AOL in 2010 for only $40 million (includes incentives). 2010 was a bad time to sell anything – stocks, real estate, businesses, you name it. But because he owned an estimated ~80% of the site, Mike walked away with around $32 million, or 50% more than Ariana even though TechCrunch sold for 85% less than HuffPo!

It’s amazing how two vastly different sales prices can result in two surprisingly different windfalls due to company ownership structures. It often takes an army of employees and capital to build something massive. I’m not looking for fame, but I’m starting to wonder whether it’s time to once again rekindle the dreams of great fortune.

Whether you know it or not, you the FS community, is instrumental in the continued content production here. I struggled for years not wanting to do anything but travel and play because years ago I finally found “enough.” But thanks to your continued support and encouragement, I’ve kept on going. People keep asking whether I will ever run out of material to write. The answer is always “never,” because there’s an endless amount of things to talk about. If you can speak forever, you can write forever.

A new adventure on Financial Samurai may begin by the end of 2015, and I’d love to get your input once more. I’ve been seriously thinking about this topic since the beginning of the year. In fact, I’ve been sitting on this post since January, going through things in my head.

Investing Insights From Former SEC Chairman Arthur Levitt And Hardeep Walia, CEO Of Motif Investing

Hardeep Walia and Arthur Levitt

Hardeep Walia and Arthur Levitt

Reddit recently hosted an Ask Me Anything (AMA) session with Hardeep Walia, Founder and CEO of Motif Investing, and former SEC Chairman (1993-2001) and Motif Investing Board Member, Arthur Levitt. There were some pretty interesting exchanges that I thought were worth highlighting for anybody who uses Motif Investing and who is interested in investing as a whole.

Topics of discussion include:

* International expansion plans for Motif

* Views on mutual funds and bond funds

* How much money Arthur Levitt has in his checking account

* How can the middle class navigate the investing landscape better

* Thoughts on high frequency trading, Bitcoin, Vanguard, the SEC, and 401k regulation

Can Cash Be Considered An Investment? Or Is Cash One Big Drag?

Cash As An InvestmentThere’s a debate going on between Charles Schwab, who recently launched its Charles Schwab Intelligent Advisors service (robo-advisor), and robo-advisors, Wealthfront and Betterment about whether Charles Schwab’s robo-advisor service really is free. Because Charles Schwab wrote that it will recommend a 8-30% cash weighting for its clients depending on market conditions, Wealthfront and Betterment have gone on the offensive to point out that investing such a huge weighting in cash is not only costly in a hypothetical market return scenario, but irresponsible as well.

Charles Schwab can make money off its client’s cash by paying practically no interest, and reinvesting the cash in higher income producing investments. In other words, Charles Schwab can act like a bank, with a much lower funding cost. This may come as a surprise to many, but those who know how the finance industry works know it’s a simple spread business. The more money that can be cheaply procured, the more money can be deployed for hopefully higher profits.

It’s good that Wealthfront and Betterment have pointed out how Charles Schwab can actually make money from its free robo-advisory product. But here’s the thing, when was there ever a free lunch? Furthermore, although Wealthfront and Betterment keep their clients fully invested at all times, Betterment still charges a 0.15% – 0.35% fee and Wealthfront charges 0.25% on money after $10,000. There are also underlying ETF fees, averaging ~0.15%, which the client ultimately pays for their robo-advisors to build their portfolios.

Charles Schwab is charging 0.00% in fees for their robo-advisory service. Yes, if Charles Schwab also charged a 0.15% – 0.35% fee to manage money like Wealthfront and Betterment, while recommending 8%-30% cash, that would be odd. But Charles Schwab isn’t.

Let’s not debate which business model is better. Instead, let’s discuss whether cash can be considered an investment through a logical discussion.

Stocks Versus Real Estate: It Depends On Your Luck

Fortune (fu) in Mandarin

Always Lucky

I’ve written a pretty detailed post about analyzing whether it’s better to invest in stocks or real estate. Check it out if you’re wondering where to put your money. I tried to be unbiased in my analysis, but due to my experience investing in both asset classes for over a decade, I came to the conclusion that real estate was my preferred choice to building wealth.

Once acquired, real estate is pretty straightforward. Maximize rent, minimize expenses, let inflation take its course, and keep tenant turnover to a minimum. You are the King or Queen of your asset. Stocks, on the other hand, require constant re-balancing, trust in management, trust in a fund manager if you buy an active fund, and careful analysis of competitive forces that may hurt your investment. Think about how many great companies have disappeared over the years. This is why I recommend keeping most of your equity investments in low-cost index funds and focus on asset allocation instead.

One commenter pointed out the reason why I prefer real estate is because I was lucky to have bought in San Francisco in 2003. In this post, I’d like to address his beliefs and see if we can all just get lucky with our investments. After all, it’s always better to be lucky than good!