I think everyone will agree that this presidency will be historic. Regardless of how you feel about the person currently occupying the Oval Office, you have to admit that this presidency has not started off very smoothly. Never has an official elected to the highest office in government has been so mired in scandal, lawsuits, and resistance so early. If his unpredictability is not enough to make you pause, maybe the fact that we are in year 9 of an economic recovery might.
Depending on who you ask or what sources you read, economic recoveries typically last 7-10 years. That is the period of time it takes for the market to normalize and peak before it crashes again. Some economists will say that the average is as low as 5 years. So whether you are optimistic, or doom and gloom, you have to admit that we are probably overdue, or at the very least, facing another recession right in the face.
So how do you prepare?
In my case, I am preparing by divesting from high risk ventures. One of the things we investing is peer-to-peer lending. In a booming economy, P2P can be a great way to make money. Personally I used a moderate risk strategy that helped me see relatively solid returns with minimal losses. I was 2 years into Lending Club (LC) before I saw my first charge-off. My LC rate of return was also 10x more that my best CD.
However, even with a moderate risk portfolio, it’s still one of the riskiest investments I can under take. I am making unsecured loans to people I have never met via a relatively new platform in untested industry. While some borrowers verify their income, those loans are rare since all investors want them. This resulted in most of the loans in my portfolio being from people with unverified information, which means that I am relying solely on their honesty to finance the debt.
As much as it pains me to give it up, it will hurt even more if I see another epic crash coming and allow greed to rule my decision. Not only that, unlike the stock market where if you leave you have to buy to get back in and you could potentially be paying more than you originally paid, this is a different format. It’s never going to be more costly for me to get back in the game if things turn out to not be as bad as I anticipated. Since I choose how big of a loan I make, I control my costs and they don’t have to be anything more than I can afford. I am also not losing on growth since my income comes from getting paid back not from market performance. Given that I am not planning on selling the loans I have on the books, I will still be receiving interest income. However, as I get paid, I will be withdrawing my funds rather than reinvesting them. Because, another risk with LC is that the company has not even been around long enough for us to know how it would perform in a recession.
One of the things about LC is that the company earns money by charging the investors a processing fee when they get paid. If most, if not all, the borrowers start defaulting on their payments, that takes away one of their main sources of income. What would happen if LC filed for bankruptcy? We don’t know for sure since there has never been a case like this as the industry is still in its infancy. But if it’s anything like other big companies that have gone out of business, we can look to Lehman and other for an idea of what could happen.
Unlike a Bank of America depositor whose funds are insured by the FDIC, investors are not afforded such benefits. If BoA went into receivership today, everyone would get their money back, up to $250k. Just like any other uninsured investment, a LC investor wouldn’t see a dime. So I do not wish to see my money sitting there waiting for things to get better. It costs me nothing to transfer in or out. So as I get paid, I go in every month and withdraw the cash balance, hoping things don’t collapse around us before I can get the rest of my money. When we either have a more stable administration or we know that we are climbing out of a recession, I will have more confidence to invest in high risk ventures in search for high rewards. Until then, I am pulling back and protecting myself from maximum loss.