Studies of Life

Learning by doing.

How not to invest on Bondora

03 May 2015 by Jim

I’ve been investing in Bondora for over a year now, and the new risk rating system implemented at the end of 2014 really seems to work. Unfortunately, I made a mistake. I invested almost the entire amount I allocated to Bondora in 2014, as you can see here:


I unfortunately loaded up on a lot of bad-quality loans for this reason, and once the new risk rating system showed up a large part of my portfolio was HR and more and more loans became overdue.
I reacted to this by trying to sell lots of HR loans to get rid of them before they became 60+ days overdue. As you can imagine, it’s difficult to sell such loans, so I had to offer discounts. Steep discounts. And I lost quite a bit of money doing that. So I now have quite a few defaulted loans. Have a look:

I was quite shocked to see how my portfolio was developing so I decided to find out how much of those defaulted loans I could expect to be recovered at some point. Here are the recovery statistics based on Bondora’s loand dataset for the whole platform:

The chart was made using a pivot table. The formula is: RECOVERY / EAD2

As you can see the loans from 2011/2012 now seem to be at their highest point in terms of recovery, 3-4 years after issue. The recovery rates are pretty high, though, exceeding 100% in most cases, which means that not only the principal and late payments were paid, but also penalty interest for the late recovery.
But I do not expect to get 100% of my defaulted loans back, because I have many loans from Spain, Slovakia and Finland, while the good recovery rates in the chart affect mostly Estonian loans (because prior to 2014 Estonia was the main or only market for Bondora).

So how well will my own defaulted loans recover? Right now, 4% of all my defaults have recovered. That percentage will increase over time but I do not know by how much. The highest point will be reached after 3-4 years, so there are still 3 years to go until then.

Until I see what recovery rates I can expect for my own portfolio of defaults, I have stopped investing fresh money into Bondora, to avoid making the same mistake twice. I’ve burned my fingers, and if no recovery were to happen at all I would have lost a total of 17% on my investment in Bondora. It’s quite awful. However, I look at it as a valuable experience that changes how I go about investment opportunities in the future. I will increase my allocation to a specific investment only gradually in the future.

I will stop investing in Bondora (and regularly withdraw money) until I see that the recoveries gain momentum, and that my new loans from 2015 (grade A, B, C, E, D only) are not defaulting at such a fast rate as my older loans.

Once Bondora is a good deal again for me personally I will reconsider starting my investment there again.

So the main conclusion and advice I can give after this surprise is:

  1. Don’t invest too much money too quickly into any investment opportunity
  2. If you don’t know a platform well,  be careful and don’t chase the highest return right away (I should have stuck with Estonian loans in 2014)
  3. Don’t worry if an investment turns sour (if I continue investing for my whole life, and I’m now 24, negative experiences will be part of it, the important thing being to learn from this and do better next time)

As you can see, even though I like Bondora as a concept, it’s not foolproof, and making the wrong decisions can cost you money. So be careful, more careful than I was.

2 comments | Categories: bondora, investment | Tags: , ,

Comments (2)

  1. Hi Jim,

    Great blogpost.

    I have roughly the same looking portfolio having made most of my investment between August and December 2014 before the new portfolio managers were introduced and while loans from Spain and Slovenia were still at low interest rates.

    Currently i have approximately 20% +61 days overdue and 25% overdue loans. The value of my portfolio in a conservative scenario (current investments + current loan income) is about the same amount as I originally invested (€58K). So unless I don’t get more overdue loans I would end up having made no money when my current loans are paid back over the next 60 months.

    What I don’t understand is that Bondora estimates my annualized net return on investment to be 21.35% (Up from 15% on May 1st when they did an update). My position as an investor is 982 out of more than 10.000, so in the top 10% best performing. I’m getting around £1.000 in interest every month which is about 58/12 = 21% and would match the number Bondora is giving me.

    What is your net return and is Bondora misleading investors or is there something that we haven’t taken into account?

    • Steffen,

      Thanks for your comment!

      Our portfolios indeed look pretty similar. The percentage of defaulted loans in my portfolio has been rising since I withdrew part of my portfolio recently. Bondora estimates my return to be 12.03% right now, mainly because I lost a few thousands selling overdues at a discount, and the discounts for that were immediately included in the calculation, reducing ROI.

      Bondora’s ROI figure is not misleading, but it all depends on how you account for the defaults, because they’re such a relatively big portion of the portfolio. I prefer to calculate my ROI myself, and depending on how much I discount the defaulted principal in my calculation my own calculation indicates a return of -17% (assuming just 4% of defaulted principal will ever be repaid) to +8% (assuming 60-70% of defaulted principal will be repaid) or so. The truth is somewhere in between. We’ll have to wait and see how well recovery works in non-Estonian markets since there’s no long-term historical data for that yet. It’s not a huge disaster but also not as straightforward as initially thought.

      Hope that helps answer your question!

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