04 August 2016

When Junk Bonds Become My Moolah

Equity hasn't been kind in recent years. While a historical performance of 10-12% (with dividend reinvested) may have been the norm of past, it's been far, far lower of late. But income investing has remained decent with 3-4% dividend payouts while REITs have been giving me 5-6%.

With a combined family portfolio that has crossed seven digits, I felt that I can afford to ante up my risk palette. So I've started placing a small percentage of investment funds into a P2P platform, specifically, Moolahsense.

Spreading my investments into numerous blocks of a few thousand dollars each and across multiple loans, it's effectively creating a DIY junk bond fund isn't it? The nominal loan interests have averaged 17-18% across the portfolio so far. With many of the payments being made on monthly basis, after a while, it seems like there is an incoming payment every other day. Is that shiok or what?

But the shiokness can be deceiving. Logically, I would expect some percentage of defaults. I mean seriously, why would any company take up loans of 17-18% if they could borrow from banks at lower rates? It's almost as bad as owing credit card debts. Clearly, the banks see them as so risky that they are not even prepared to offer them a cent. So, everyone of them is a potential default case.

Like banks that make provisions for non-performing loans, I'm making a provision for 5% defaults. In simplistic sense, if a $100,000 portfolio is making 17%, that's an interest of $17,000. With a 5% default on principal, that's a loss of $5,000. But, the overall outcome would still be 12% gain in net income. Not bad.

But, if the defaults climb above 17%, I'll be in the red.

I'll see how this turns out after a year or two.

Supposing a portfolio of $1.3 million with a spread as follows:
- $1,000,000 of stocks @ 3.5% dividends = $35,000
- $200,000 of REITs @ 6% = $12,000
- $100,000 of P2P loans @ 12% = $12,000
That would generate a passive annual income of $59,000, or almost $5,000 a month.


Cory said...

Your P2P lending get me excited. My Greed lah.

For 17-18% interests and which is higher than bank charged, 5% default assumption seems too low.
That's my guess.

How long is the loan period and is it to individual attribute that you selected to loan ?
Will an economic recession skew your default rate statistic significantly ? Is there recourse for lender on those who actually defaulted ?

Singapore Man of Leisure said...


Ah! Another guy next door ;)

I raise my glass to you.


B said...

Hi Lizardo

Can you let us know if the nominal interest rate of 17% is really what we get? Last I heard it gets amortized and the true interest we are getting is only around at 9%.

Im curious on it as well.

Lizardo said...


I'm not optimistic about any form of recourse if the borrower folds. Have to be prepared to take the loss.

Each loan typically 12 months.

Lizardo said...


*clink* Bottoms up.

Lizardo said...


On a per loan basis, the actual rate would be lower depending on the type of loan mechanism. There are different systems involved - e.g. some pay interest-only monthly until final day, others involve reducing capital as the loan gets paid down each month and hence reducing absolute interest, etc.

But if you keep cycling the cash (including repayments collected) into 17-18% interest loans, you should still achieve close to it if calculated on an annual basis (I think?). Will know better after a year of experience. Can't quite tell now.

There are periods of idling funds as there may be no new borrowers to lend to.

Anonymous said...

Haha...We are drinking from the same cup of tea. I'm still alive today bcos of this DIY junk bonds.


Lizardo said...


Cheers. Drink with care though. It is after all junk ultimately. Heh.