• SmartMoney

Should I Join a Direct Investing Program?

Question: Are direct investing programs like Lending Club and U-Haul Investors Club a good idea for average investors?

— Henry

Answer: In general, investors should consider all their options, not just the roads most traveled.  But your specific answer will depend on how how much risk you’re willing to assume and whether, at any given moment, these services offer higher yields than traditional investments.

The securities universe mostly consists of two basic choices: debt (including bonds and loans) and equity (including stocks and business partnerships). The programs you mention are examples of debt securities.  At one end of the debt spectrum are regulated, liquid bonds like Treasuries, municipal bonds and corporate bonds.  Investors can buy and sell these with relative ease and have access to plenty of information, including financial statements and third-party opinions from bond-rating agencies.  But, because so many investors compete for returns in these bonds, attractive yields aren’t always easy to find.

At the opposite end of the spectrum are purely private debt investments like “hard money” loans and private mortgages.  Experienced investors can earn solid returns with such investments, but they must be able to perform their own analysis, stake large sums for long time periods and take appropriate action in the case of late payments.

Investing programs like the ones you mentioned are a middle ground.  The securities are registered with regulators and subject to reporting requirements, but they’re not especially liquid, so they’re best for long-term holders.

Peer-to-peer lending services like Lending Club match investors with borrowers while providing credit information and collecting a fee.  U-Haul Investors Club specializes in loans that are backed by hard assets like trailers.  Neither program has a history of returns as extensive as that of standard bonds, but then, neither idea is a radical departure from private lending.  Investment minimums are lower, and what investors lose to fees they might gain from convenience.

To decide whether these or similar programs offer good deals, review plan information carefully and then compare rates with those available elsewhere.  The WSJ.com Market Data Center is a good place to look for rates.  For example, the 10-year Treasury, which carries minimal credit risk, recently yielded around 2%, while a Merrill Lynch index of high-yield or “junk” corporate bonds recently yielded over 8%.

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