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Monday, 16 October 2006

My thoughts on Prosper.com

As I don't have a US SSN I can't invest in Prosper.com, but I've seen quite a lot of posts by PF bloggers considering investing this way. Although the idea is interesting, and I might be tempted to invest a few hundred dollars myself if I could (bear in mind this would only be a tiny % of my total invested assets), I have some concerns which I posted as comments on Fearless Money.

I think they have general application to anyone considering putting money into Propser.com loans, so I'll repeat my comments here:

Please review the concepts of "there'no such thing as a free lunch" and the trade-off between "risk vs. reward" before investing in Prosper.com

And remember that buying 11 small lots of a single risky investment class does NOT reduce risk, as you are not actually diversifying if you stick within a single asset class/sector. eg. if the economy tanks then ALL Prosper.com borrowers have an increased chance of defaulting.

Also, remember that they're lots of investors looking over the Prosper.com opportunities, so to "win" a slice of debt you have to underbid the others- ie. you were willing to take the LEAST return for the estimated risk.

You may luck out and have 10x$100 invested at 11% and get it all back with interest. But, based on the current "riskless" rate of around 5%, it's more likely that you'll not get paid the full interest due on several of these parcels.

There's also a risk that you might not get your $100 capital back either. Did you notice the following bits in the Prosper.com FAQs?

"There are no guarantees that your loan will be repaid"

and

"Prosper is not directly insured by the FDIC, but lenders' deposits are covered up to $100,000 by FDIC pass-through insurance provided by our banking partner, Wells Fargo Bank."

The bit about NOT being insured by the FDIC is clear. I've no idea what FDIC "pass-through" insurance is - it might just mean you're insured against Wells Fargo losing your money during transit from your account to the borrowers! If you intend to invest in Proper you should know exactly what this means, and get confirmation from Wells Fargo in writing.

The first rule of investing is "if it looks too good to be true, it probably is". I'm not sure if that's covered in "Secrets [sic] of the Millionaire Mind" or "Millionaire Maker's Guide..."

It's probably also worth remembering that back in the good old days of "community lending" a run on the local bank often meant that the depositors ended up losing their entire life's savings.

1 comment:

Anonymous said...

With Prosper I think it would be very hard for eleven loans to go bad for any one investor. Since most lend only $50.00 to $100.00 to any one loan. You will not lose much and you will have much more to gain. This properly managed will out do any mutual fund that most people with hardly any money to invest can do. For people who want to save money in a bank account and then invest their money. Prosper in a much better place to place their money.