My one year experiment comparing the performance of 4 investment options is now over. 2015 was a pretty hairy year for investing, and 2016 hasn’t started out so hot either. Especially after a year like 2015, I advocate investing for long-term goals because you have time to ride out the ups and downs of the market and can buy more when the market is down. For short-term goals, reducing expenses and saving in online savings’ accounts is the best option.
What is the $1,000 Investment Challenge?
In September 2014, I decided I needed to step up my savings game a little bit and wanted to try out 4 investment options to see how they compare over time. On October 1st, 2015, I deposited $1,000 into each account and started contributing $100 a month.
In total, I contributed $2,200 ($1,000 initially + 12 months of $100) into each account with varying degrees of success. After the one year period was complete, I stopped contributing to the accounts and began the liquidation process as I reviewed my options on where to focus my investment decisions next.
The $1,000 Investment Challenge
- An Introduction – Where to invest $1000 – my investment challenge
- Investing with Prosper peer-to-peer lending
- Investing with Lending Club peer-to-peer lending
- Investing with Betterment
- Investing with Sharebuilder
How has the market performed?
For the 12 months starting October 1, 2014, the stock market is roughly flat. The performance was great through the summer of 2015, but then the bottom fell out of the stock market starting August 17, 2015 for the next week, then bounced on August 28, 2015 as investors realized that they overreacted (as they tend to do).
Through the end of September 2015, the markets traded within a specific range, but never recovered. Essentially, the stock market end September at the same price they were in mid-October 2014 — almost a full year lost with no gain.
Over the 12 months, the Dow was down 3.1%, the S&P was up 1.3%, and the NASDAQ performed best by being up 4.3%. These returns certainly won’t get anyone excited.
Since October, the market has taken a further turn for the worse. Since October 1, 2015, all three are down 2% to 3%, with the drop starting on December 29, 2015.
How did my investments perform for the year?
The investment returns were mixed because some investments were heavier in stocks, while others were equivalent to investing in bonds using a peer-to-peer lending focus. Lending Club and Prosper gained in value, while Betterment and Sharebuilder were negative. Losses in my existing portfolio at Lending Club are hurting the results a bit, since it is unlikely that there will be a default within the first 12 months of a loan’s issuance. Because the Prosper portfolio is not “seasoned” (meaning that all of the notes are newly issued), there is less of a probability of default (borrower missing a payment).
Because I had an existing account with Lending Club, I am making a manual adjustment for my existing balances to normalize to the $1,000 investment that the other options received. There is still an advantage for Lending Club over Prosper because the notes invested in are already funded from Day 1.
Although Lending Club gained in value during the last year and was the 2nd best-performing asset, the challenging situation with Lending Club (or any peer-to-peer lending platform) is that, when you are ready to (or need to) withdraw from your account, you are limited to withdrawing only the uninvested cash.
I stopped reinvesting payments from notes into new notes in October 2015. I began withdrawing from Lending Club in October and have been been able to withdraw only $901.34 through January 2016, leaving over $3,000 still invested with Lending Club. As borrowers continue to pay back their loans, I will continue to withdraw as much cash as possible from my account. Each withdrawal I submit takes approximately 4-5 business days before it posts to my checking account.
Click here to open an account with Lending Club and receive a bonus of $25 when funding with $5,000 or greater.
Prosper is another peer-to-peer lending platform. Unlike Lending Club, I did not have a Prosper account open prior to starting the $1,000 Investment Challenge. The returns were positive with Prosper, just like Lending Club. There were few late payments and charge-offs, so the Prosper account had the best returns of any of the 4 investment choices.
Unfortunately, just like Lending Club, I can only withdraw the cash that has been paid back so far. Through January 2016, I have been able to withdraw $222.29 from my account, while leaving almost $2,000 still in the account… awaiting repayment from borrowers until I can withdraw more. Each withdrawal I submit takes approximately 4-5 business days before it posts to my checking account.
Click here to open an account with Prosper.
My Betterment was heavily invested in stocks, with a 90/10 split between stocks and bonds. Although the year ended down, the market was up most of the time, so even though I was dollar-cost-averaging (monthly contributions of the same amount), I was buying fewer and fewer shares as the market went up, and now the market has dropped, I am in a loss position.
Normally, I don’t advocate for investing in the stock market for short-term investments for this particular reason — you can be contributing to your account while the market continues to rise, then when you need your money, the market can be down and you’ve lost value. Investing in stocks is best reserved for money that has a goal 10 years or more from now… anything less and you are basically gambling.
That being said, I want to retire before “traditional” retirement age, so I’ll need to contribute to an account that is not a IRA or 401(k) that allows me to withdraw without penalty. I’m going to consider Betterment as an option to help me meet this goal.
For now, I closed my account with Betterment as I evaluate my next steps. There were no fees and the money was quickly transferred into my checking account.
Click here to open an account with Betterment.
In my Sharebuilder account, I am investing in the USAA First Start Growth (UFSGX) fund because it is a no-fee option and has a mix of stocks and bonds, otherwise known as a balanced fund. The Sharebuilder account’s performance is boosted because there was a sign-up bonus of $50. The $50 bonus serves to boost returns somewhat, so in the graph below, I show the returns with and without the $50 bonus.
I closed my account and withdrew the balance. It was a quick process, but there was a $49.95 “early redemption charge” that hit my account as I closed it. Essentially, that negated the $50 bonus I earned when opening the account. Although it may seem like a wash, I am most likely in the negative because I will receive a 1099-INT for the $50 Sharebuilder credited me, yet I will need to consult with my tax advisor whether or not the $49.95 will be a tax write-off.
Click here to open an account with Sharebuilder. They often provide bonuses when you sign up, so I would hold off until you find a bonus that fits your objectives. Also consider opening an online savings account with CapitalOne360… there are no minimums or monthly fees. And there’s currently a $25 bonus when you open either a checking or savings accoun.
How do the performances compare to each other?
One of the main purposes of this investing experiment is to compare their performances against each other. The lending-based options of Lending Club and Prosper were the clear winners since they were not tied to the performance of the stock market. Betterment and Sharebuilder lost money due to the roller coaster year that stocks experienced. Sharebuilder performed better since it was a “balanced” fund that contained more bonds (40% to 10%) compared with Betterment.
Keep in mind that 2015 was not a “typical” year for stocks and we are at the tail-end of a massive bull market that saw stocks reach new all-time highs after recovering from the depths of the Great Recession years ago. I would not count on stocks being the losers multiple years in a row. In comparison, all 4 options either matched or beat the performance of the Dow.
Prosper was the champion with a 3.6% gain, with Lending Club a close 2nd at 1.3% gain. The stock-based investments both lost money, with Sharebuilder at 2.4% loss (aided by a $50 sign-up bonus and a 60/40 split between stocks and bonds) compared to Betterment at a 6.3% loss (due to a 90/10 split of stocks and bonds). The Dow lost 5.8% over the same 12 months.
Keep track of your investments
No matter where you invest, keeping track of your investments is key to knowing how close you are to reaching your goals. I keep track of all of my investments using the free online management tool, Personal Capital.
Personal Capital allows you to track a wide variety of accounts, such as your 401(k), IRA, bank accounts, brokerage accounts, and real estate. Click here to sign up for Personal Capital.
It was fun to compare investments that were significantly different in their objectives. Given the turmoil in the stock market, the results were as expected — lending made money, while investing lost money. The bottom line is that diversification and dollar-cost-averaging matter. In a year where the Dow lost 6%, I lost less than 1% — $8,718 ending balance compared with $8,800 invested.