Confession from my YouthI wasn’t always as responsible with money as I am today. Let me take you back to 2006. I was a single 24-year old and making okay money for the first time in my life. Investing was still new to me, which might seem odd for someone in the financial services industry. My job at the time dealt more with reporting investment managers’ performance than making any investment decisions. I hardly knew how to invest my own 401k. Clearly I wasn’t an investment advisor yet.
I was starting to save up a little bit of cash and read a Star Tribune article on a new company called Prosper. We now call these companies peer-to-peer lenders. It was an alternative to credit card loans and personal loans, a new concept at the time. People with money (me?) loaned money to people who needed money at pretty nice interest rates. After about an hour of research, I was convinced. I could earn 8% loaning money to high quality borrowers at that time.
I transferred $1,000 into my brand new Prosper account. Then I started making loans. It didn’t take long for me to be drawn to even higher interest rate loans. Why would I make a loan to a high quality borrower at 8% when I could loan to someone with a bad credit rating at over 25%? I mean, people have to pay back their loans, right?
WRONG! I bet I made a dozen or so loans of $50-$100 at really high interest rates. Default after default left me with only $700 after four years. Yes, that includes the interest I did earn along the way. I lost 30% of my investment.
What went wrong? I could be here all day making that list. Let’s sum it up by saying I rushed into a brand new asset class without doing my research. I didn’t stop to think that there might be a reason why the potential returns were so high. I didn’t know that risk and return are related. Heck, I didn’t know a thing about lending.
My 36 year-old self has learned to laugh at this story. Sometimes the best way to learn in life is to watch your hard-earned money go up in flames. Oh, and to top it off, I got married during this time. So I had to explain to my wife why I made such a dumb investment and that I would never do it again.
If you find yourself tempted to make an investment into a new idea (or something new to you), take your time to do your research. Consult with an expert on personal financial planning (not a so-called expert on the new asset class). Think about what can go wrong, then see if you are still convinced that it’s a great idea.