Tuesday, April 1, 2008

How I grew my money 36% in 30 days!

Okay, so maybe 36% growth is a bit misleading. It's only the portion that I've invested that has grown that much, and I didn't have much to invest. But I did turn $150 into $205.08 (as of this moment) without any effort on my part. For a first-time investor, this is hugely exciting. Who needs to go shopping when you can invest??

I currently have 3 investment vehicles.

1. RPSIX, T. Rowe Price. This is the "Spectrum Income" index fund offered by TRP. It is a 4-star Morningstar rated multisector bond fund. It invests in domestic bonds (63.7%), foreign bonds (16.6%), domestic stock (15.1%), cash (4.4%) and convertibles (0.2%). This fund is primarily used as a safer investment vehicle since it primarily invests in bonds, which are historically and inherently less risky than stocks. It has a 0.70% expense ratio, and has returned 8.04% since inception (1 year 4.66%, 3 year 5.85%, 5 years 7.44%, 10 years 6.16%.) Its low price over the past year is $11.88/share, while its high is $12.39. I bought 4.17 shares @ $11.99.

2. PRSGX, T. Rowe Price. This is the "Spectrum Growth" index fund offered by TRP. It is a 4-star Morningstar rated large blend domestic stock fund. It invests in domestic stock (71.17%), foreign stock (25.6%), cash (2.9%) and convertibles (0.4%). This fund is geared primarily towards long-term capital growth as opposed to short-term income and thus carries more volatility. It has a 0.81% expense ratio, and has returned 10.09% since inception (1 year -4.30%, 3 years 8.22%, 5 years 15.02%, 10 years 5.71%.) Its 1 year low was $18.08, while its high was $23.43. I bought 2.765 shares @ $18.08.

3. LendingClub. This is a peer-to-peer lending website that I tried out more as a lark than anything. I put $50 on the site. I have since lent $25 to 4 different borrowers. All 4 were looking to consolidate debt. I focused on those with lower debt-to-income ratios and no recent deliquencies. I also considered the length of tenure at their current job and avoided people listing self-employed or had exceedingly high self-reported incomes ($10,000/month as a consultant made me uncomfortable, for example.) One of my loans is at 9.76% interest, the other 3 are at 14.18% interest (LC automatically assigns interest rates based on how they grade a borrower, which takes into account FICO scores, amount of the requested loan, etc.) These loans will pay back over 36 months. This is obviously the riskiest investment vehicle, but the one with the highest expected rate of return.

So how have I gotten a 73% increase on my investments?

The vast majority of it came via referral bonuses from Lending Club. I signed up via a referral link and received a free $25 (no restrictions!) to begin investing. Someone else signed up via my referral link, giving both of us $25 in our accounts. I put in $50.95 (the $.95 was actually money debited from my funding account to verify my ownership.) Thus, I doubled my investment on here already with absolutely no work.

Then, one of my borrowers made their first monthly payment today. $0.60 went to principle, $.20 went to interest, and $0.01 went to Lending Club as their fee. This money was automatically deposited into my account, leaving me with $1.74 in the account and $99.40 funding loans, for a total of $101.14. That is a 98.5% ROI for this month for Lending Club.

My index funds have gone up by $.02/share and $.63/share, respectively, since I bought them. That's a 0.16% ROI for the income fund and 7.72% ROI for the growth fund. Now, that's only $3.94 in actual dollars, but I've only held these funds for a couple of weeks.

So what have I learned from this month?

The first is to start investing sooner rather than later. Ultimately, I would prefer to have my investments at Vanguard instead of T. Rowe Price. I like their expense ratios and fund managers better. Vanguard, however, requires $3,000/fund, a lump sum I simply don't have right now. T. Rowe Price allows me to invest in funds for $50/month (as an automatic transfer.) Given the extremely low interest rates for even high-yield savings accounts, I'm getting a head start buying funds. Additionally, they're essentially on sale due to the downturn in the economy. If I needed this money immediately or in the short term, I wouldn't invest it, as the economy could continue to look bleak for a while. However, I have a long-term horizon for my investments, so I want to buy as many shares during the low points.

Second, I did my homework and thought about my asset allocation. My Lending Club investment is mostly a lark - the referral program is excellent, I have a pretty decent chance of a good ROI, and some people have really been helped by peer-to-peer lending. Ultimately, I would love to have around $800 lent out, as the monthly payments would allow me to fund a new loan every month. I would spread this out over 32 different loans, which minimizes the impact of any individual borrower defaulting. It could become a pretty good passive investment vehicle, but I'm not going to rely on it for money to feed myself. Investing in bonds provides me with a reasonably safe investment (as far as investments go.) I'll get a better ROI than putting it simply in a savings account, and I can put 2 months of expenses in this fund and have it work for me. Finally, I chose a growth index fund for long-term capital building. I won't put any money into this account that I would starve without, because there is always risk. I balance a good expected ROI with the safety inherent to index funds. Because they track an entire market (or segment of a market) instead of a single corporation, I am much more diversified than if I tried to pick individual stocks.

Overall, I chose index funds for the bulk of my investments for two reasons. First, I simply don't know enough about the stock market to feel confident in picking individual stocks. Most investors can't beat the S&P, particularly once trading fees are factored in, and I have neither the time nor the inclination to research stocks that heavily. Second, I invest for the long term. I don't intend to attempt market timing, so I don't need or want an active method of investing. Index funds, for me, provide both a better return on investment and less risk.

Are there reasons not to follow my path? Sure, lots. The biggest one would be your ability to tolerate risk, both financially and emotionally. I don't invest money that would cripple me if I lost it. I pay bills first, keep an emergency fund in a savings account with no risk, and then and only then do I invest. Moreover, I'm not bothered by market fluctuations. There will be days where my investments will be in the red. This won't panic me - the stock market has historically resulted in increases of capital and has outpaced inflation. My investments will be used for major purchases several years down the road (like a house) or hopefully never (my safety net fund.) Bad weeks or even bad months don't affect my investment strategy.


  1. hi. first of all, i would like you to know that i love reading your blog. i think you are a really brave woman. i don't know how you do it...but you go girl!

    secondly, i have a question about your investment with t rowe price. do you have to pay any account fees with theM?i can't seem to find that on the website. thanx! and how do i get a referral for lending club?

  2. Thanks for the kind words. It's been a rough few days recently, which I'll blog about at some point, so it's nice to get some positive feedback.

    To answer your questions, there are no account fees for TRP, at least not investing the way I did. You pay a small administrative fee once you withdraw money, in the form of dividends or a true withdrawal. In terms of Lending Club, just click on the link from my sidebar and sign up in the same session/window, you'll get the referral, even though it won't give any official confirmation.

  3. hi. the link has been taken down. how about emailing me? its lilpunkATgmailDOTcom (its real, i promise!)