Thursday, August 03, 2006

How does prosper fit into my asset allocation?

I've been thinking about this one a bit.

My investments are divided into three parts:

1. retirement - which are almost entirely in Schwab's lifecycle fund (SWERX) or unspectacularly, Barclay's Life Path (STLEX) (90% of a 401k account). I've added a small hint of American Funds EuroPacific (5% of a 401k account) and Lazard's Emerging market (5% of a 401k account) to the Barclay's 401k account to obtain more international exposure.
2. insurance investments - these investments are stuck in variable life and whole life insurance policies and will eventually be liquidated this year. The cash will be put into #3, below.
3. a brokerage account - this account is the smallest of all 3, with about $30k in investments, almost entirely placed in ETFs. I have about $2400 each in two actively managed closed end funds (CEFs) RNE - morgan stanley's russia and eastern europe fund and IIF - the India Fund. I'll be publishing the details of this account in another post.

The brokerage account is the account where I hope to use lessons from Bernstein on portfolio management. On the whole, I'll be avoiding actively managed funds except in fairly special markets where ETFs don't exist.

My retirement accounts automatically invest a certain percentage of assets in bonds (between 10-20%), but my brokerage account is entirely in equities.
On the other hand I have $2000 in prosper and wonder if I should incorporate prosper investments, which act like 3 year bonds (junk bonds?) into my brokerage allocation model.
That is, maybe I'll use prosper investments as part of my investment allocation model when looking at my brokerage investments. If so, I'll probably keep 20% of my equities in the brokerage account in fixed income, which would encourage me to increase my prosper holdings to $6k. As I add $500 per month, I'll reach it in 8 months. Alternatively, I could buy some bonds, mutual fund or etf (do bond etf's exist?).

Would you consider Prosper loans as part of your asset allocation model?

it's an interesting idea, however, there's a bigger question pending:

when creating my overall investment asset allocation model, should I separate my retirement and brokerage investments or combine them? I'll tackle this question in a separate post.

Have a wonderful day,


mOOm said...

TLT and TIP are two bond ETFs - there are plenty of actively managed closed end bond funds.

I've looked at Prosper but in order to reduce the default risk you need to make lots of little loans which sounds like a hassle or devote a lot of money to it. Investing in an emerging market bond fund like GHI or EMD would seem to make more sense to me.

makingourway said...


What great ideas. Thanks alot!
I'm definately going to look into the ETFs and emerging market bond funds you've mentioned - at least for comparitive purposes.

You're absolutely right about prosper - you need to make lots of little loans for it to make sense. The question is can I achieve risk adjusted returns of 12% or more with the various bond funds?

If I can, it probably makes sense to go that way and drop prosper - as it is quite time consuming.

Incidentally, I've done some very basic research and it seems that D credit loans seem to have the greatest risk adjusted return running at about 12%. If it's actually true, you can have prosper automatically bid different risk grade loans for you. It seems to have worked for me only once.