What it does: Betterment has one of the easiest-to-use, slickest interfaces to manage a balanced portfolio for long-term investors. Fund your account (you can automate this) and dial in your preferred risk mix and Betterment chooses a basket of exchange-traded funds (ETFs) for your portfolio in accordance to Modern Portfolio Theory. You don’t ever need to decide on what to buy if that’s not your thing.
Particular strengths: For investors who don’t want to be overwhelmed with investing decisions or jargon about individual securities, Betterment has done a really effective job removing the confusing part by getting investors to focus on what really matters: setting goals, focusing on time-frame, and risk.
How popular is it: As of November 2011, Betterment reported that it had 10,000 accounts and $36 million under management.
The Company
Management: Betterment was founded by Jonathan Stein, an experienced professional on the technology side of the financial industry.
Company Size: Betterment has 10 employees (Source)
Outside Investors: Bessemer Venture Partners led an investment round of $3 million at the end of 2010.
I have to admit: investing in peer to peer loans didn’t initially appeal to me.
I thought it would be hard to assess the risk in lending to individuals — after all, that’s what banks get paid the big bucks for, right?
But 5 years after Lending Club first launched its website, the firm has pioneered a whole industry, not just to say a new asset class. There have been over $1B in p2p loans underwritten and investors like me are now using p2p loans as a core holding in the fixed income part of their portfolios.
Founder Renaud Laplanche joins me on Tradestreaming Radio to talk about how the p2p loan industry cures some major inefficiencies in the market for capital, does a better job sizing up and personalizing risk, and how his firm and industry might just eat the banking system’s future lunch.
In investing, earnings drive stock prices. The thing is, though, for many higher growth firms, it’s really hard to determine just how likely a firm is to hit its stated targets.
An earnings miss — or even a hint of one – can be disastrous to share prices.
So, investors spend a lot of time listening to this analyst and that pundit explain his expectations for earnings.
The truth is, very few of these guys get it right.
A better way to get earnings estimates: crowdsource ’em
Most of the time we use analyst consensus earnings — an average of all the different Wall Street opinions.
The problem with using an average is that earnings estimates on certain stocks diverge pretty significantly and taking the average isn’t an entirely accurate way of trying to gauge earnings.
There are a couple of ways to do this better/smarter right now.
In a world without guaranteed pensions, responsibility for retirement planning falls on investors’ (not-wide-enough) shoulders.
Thankfully, the 401(k) account is a great way to save for retirement by delaying taxes and encouraging company matching programs (yep, that’s free money).
But, while investors have seen the options of what they can invest in improve over the past decade, it’s still somewhat hard to get professional advice for 401(k)s because your typical financial advisor doesn’t get paid for doing so (he can’t custody the assets and therefore, isn’t interested in helping).
So, where do you turn when you want more guidance on your assets in your 401(k)?
IQ and Mutual Fund Choice: A study of Q’s influence on mutual fund choice. High-IQ investors are less likely to own categories of funds that tend to charge higher fees.
A Tool for Improved Mutual Fund Transparency: The template offered here is a tool for providing transparency in normative mutual fund disclosure in a convenient online package.
Mutual Funds: Pretty much everything you need to know about ’em. A survey article of recent literature on mutual funds.
The Winner’s Curse: Too Big to Succeed?: Robert Arnott and Lillian Jing Wu out with a paper that looks at the results of investing in “Top Dogs”, the leading companies in their industries. Turns out it’s really not a great strategy.
Kudos to Tadas (like how that sounds) at Abnormal Returns for his recent blogging and book about what’s know as the low volatility anomaly.
Simply, accepted theory is that higher volatility stocks (ie riskier) should perform better than lower volatility ones over time. You know, the old risk-return tradeoff.
The thing is that in practice, they don’t.
There’s been a growing body of research and interest into this phenomenon and I thought it would be worthwhile to make some order out of this.
The investor’s guide to the low volatility anomaly
Much of the interest into this curious fact has stemmed from academic research.
There aren’t a lot of really innovative search technologies for investors.
That’s changing — researchers and entrepreneur are looking at unique ways to classify financial product data on mutual funds and ETFs. That means it gets easier for us to identify new investments that make sense for our portfolios.
Uri Kartoun, co-founder of Stockato, has some great academic experience in robotics and classification of large data sets and he’s turned his attention to investing.
Uri joins us to talk about how his set of cloud tools can help this generation of investors find the investments they’re looking for…and maybe what they didn’t know they were looking for.
Listen to the FULL episode
About Uri Kartoun
Uri received his PhD from the Ben-Gurion University of the Negev in Robotics and Intelligent Systems and worked as a research Software Developer Engineer at Microsoft Business Solutions Group.
The Sedo IDNX tracks the latest trends in domain prices.
Domain names rapidly gained in value between 2006 and 2007, with prices peaking in November 2007 (an increase of 76% compared to January 2006) before falling by 34% in the subsequent five quarters. Domains have steadily regained their strength since then, climbing to an all-time high in May 2011.
Domain name index performance
For more info on the index, its composition, and performance, check out IDNX.com. More specifically,
On average, domain prices grew by 9.3% per year in the last 6 years, exhibiting a boom and bust pattern that closely resembles the path of the overall IT market (Source: Valuable Words: Pricing Internet Domain Names)
Now, I’d like to look at how investors can lower their risks of defaults on these types of loans and boost their overall returns.
The problem with P2P loans
Like in most areas where information is asymmetrical between two parties entering a transaction, p2p loans present an informational problem.
Borrowers know a lot more about their potential to repay a loan than those making the loan.
In a traditional banking relationship, banks have resources to attach a number (a credit score) to a loan. Given experience and data, banks can estimate the probability that a borrower with that number will default. It’s an imperfect solution but works (at least, most of the time).
Borrowers on p2p marketplaces like Prosper.com aren’t given an actual credit score. Instead, they’re grouped into categories of credit worthiness which further complicates our ability as investors to assess their ability to pay us back.
How social networks help investors better their returns
To mitigate this problem, p2p loan marketplaces have created their own versions of social networks where borrowers can friend people and organizations.
And you guessed it — these groups are key to helping us investors determine the chance that our investments pay off (or don’t).
Why? Because research has shown that borrowers with friends on these investment platforms are:
more likely to get their loans funded (not necessarily a good thing — we want borrowers to get funded and be more likely to pay).
less likely to default on their loans (bingo!)
Why? It’s all about signaling.
The results suggest that verifiable friendships help consummate loans because they are credible signals of credit quality
We want to invest in loans that provide us with a good return but are also the “right” type of borrower. Using friends and endorsements are key to solving this issue.
We show that borrowers with online friends on the Prosper.com platform have better ex-ante outcomes. This effect is more pronounced when friendships are verifiable and friends are of the types that are more likely to signal better credit quality. The results are consistent with the joint hypothesis that friendship ties act as a signal of credit quality, and that individual investors understand this relationship and incorporate it into their lending decisions. To further pin down why friendships matter, we examine whether friendships are related to ex-post loan outcomes. We find that borrowers with friends, especially of the sort that are more likely to be credible signals of credit quality, are less likely to default.
9 ways to improve our chances investing in P2P loans
If you’re like millions of people, you’re probably worried about your net worth.
Pretty worried.
The market’s up and then, it’s down. Jobs are being created and lost. Banks are stable and then they lose $3B seemingly overnight. And politicians? Nobody seems to have a strong plan to get us through and certainly not the political will to see it through.
It’s not entirely clear if the economy is recovering or not.
Investments: riskier, less diverse, zero confidence
If you have investments, you’re probably experiencing the following:
Volatility spikes: The market has the great ability to lull people into a false sense of security and then, wham! You get periods like the beginning of May where it feels like the world is ending. Nothing looks good right now. Nothing feels right, either.
Diversification doesn’t seem to be working: It may be exchange traded funds doing it or just a general move towards passive investing, but all types of investments are moving more in tandem. When stocks go down, they bring down other “safer” assets. The theory of diversification isn’t providing the benefits it promised. That’s where we are — when things are bad, it seems that there is nowhere to hide.
Lack of confidence in reaching financial goals: Many investors are just throwing up their hands. No más. They feel the stock market is rigged (it is, somewhat) and don’t want a part of it. But in an environment where bonds and CDs pay so little, underfunded-for-retirement investors need to reach for more risky assets and are forced to play a game that they don’t want to play.
