Investing in the finance crisis

The Wall Street domino has toppled just about everything in sight: U.S. stocks large and small, within the financial industry and outside of it; foreign stocks; oil and other commodities; real-estate investment trusts; formerly booming emerging markets like India and China. Even gold, although it has inched up lately, has lost 10% from its highs earlier this year. Not even cash seems entirely safe, as money-market funds barely averted a “run on the bank.”

So reads the Wall St Journal’s “Intelligent Investor” for September 30th. Me, I’ve paid off my car loan–I figure JPMorganChaseLehmanWashigtonMutual could really use some more cash, and it’s a guaranteed 6% for me.

But that was my last debt, which means that I have no other safe returns. As I think about the crisis, one element that jumps out is how poorly the financial sector has matched money to risk. But I figure I might be able to do better. So I started looking at the well-publicized Kiva, to make loans, but it seems that these loans are all of the ‘feel-good’ variety, which is to say there’s no premium or return. And while I might place some money through Kiva for feel-goodness, I don’t want my best outcome for investing to be “and I don’t lose money.” So I’m looking at organizations like Prosper or Zopa (personal loans) or Fynanz (student loans).

I like the dis-intermediation aspects of these services and their chaotic and libertarian nature. Do any of our readers have experience with these, or services like them? Should I instead look to loan to people I know?

It seems that as the entire financial system of the US is consolidated into three institutions, there’s room and demand for some interesting and new structures to emerge from the chaos.

7 thoughts on “Investing in the finance crisis

  1. The Wall Street domino has toppled just about everything in sight: U.S. stocks large and small, within the financial industry and outside of it; foreign stocks; oil and other commodities; real-estate investment trusts; formerly booming emerging markets like India and China. Even gold, although it has inched up lately, has lost 10% from its highs earlier this year. Not even cash seems entirely safe, as money-market funds barely averted a “run on the bank.”

  2. I should point out that Kiva outperformed the Dow by about 39 point over the last 12 months.
    “There are times you worry about the return on your money. Then there are times you worry about the return of your money.”
    -Bill Gross
    Just saying.
    Zweig’s WSJ column is an island of sanity.

  3. I don’t want my best outcome for investing to be “and I don’t lose money.”
    Actually, in the current climate that sounds like a pretty good outcome 🙂

  4. There’s always treasury bonds — you won’t make much interest on them in the current climate, but you won’t lose money, either. If you’re worried about inflation, I bonds might make sense. They pay the rate of inflation plus a percentage (currently 0.00%, unfortunately.) Also, money market funds are looking pretty safe now that the government has promised to backstop them.
    If I had money I wasn’t going to need in the next 5 or 6 years, though, I’d put it in an S&P 500 index fund, close my eyes tightly, and hang on. It *will* go up again eventually and the way to make money is to buy low…

  5. Zopa has closed or will closed US operations in the next 2 months and Prosper is no longer offering lenders the ability to invest. That leaves Fynanz. Interest rates are good but not as high as Prosper. However, Fynanz does protect the lenders against default to some degree.
    Note: I am a lender on Fynanz and Prosper.

  6. `there’s room and demand for some interesting and new structures’ –
    It is going to take a few years though. First guys running the show should take responsibility and step down; Second things need to stabilize. First item doesn’t seem to be happening at all.

  7. Kiva: not a bad organization, I have a few loans there. I was recently jaded when I learned that their ‘field partners’ that actually make the loans to the people charge an average interest rate of 22%. I’m not putting anymore money towards Kiva and will only choose loans whose field partners charge a much lower interest rate to borrowers. Kiva has performed better than my IRA and 401k.
    Prosper: I’ve been a lender here for a year and a half and I still have mixed feelings about it. Don’t put any money there you aren’t prepared to lose. Personally, I play on Prosper more for entertainment than for serious financial gain – and its got better returns than the casino. Its riskier than the stock market and your potential for beating the stock market is actually pretty low I think. If you decide to go here, check out http://www.prospers.org because there is lots of good information on that site. For now tho, Prosper is closed to new lending commitments while they are doing a filing with the SEC. See also: Lending Club

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