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“Price is what you pay.  Value is what you get.”  ~ Warren Buffett
AlphaFlow, with a mission to make it easy to invest in previously inaccessible asset classes, has again enhanced its value with a new addition to the Client Services team.  Aleese Peterson-Cotton, AlphaFlow’s Associate Director of Client Services, brings further depth and experience to the team already comprised of finance, real estate and technology professionals.

Experience

Aleese brings more than fifteen years of financial services experience, including wealth management and banking, to the AlphaFlow team.  Having moved to San Francisco in 2017, Aleese worked most recently as a Financial Advisor for an RIA in San Mateo following her departure as a Vice President and Private Client Advisor for US Trust in Southern California.  Prior to joining US Trust, Aleese worked for Bank of America N.A. in retail, mortgage, business banking and as a manager of preferred banking centers throughout San Diego County.

Transition

A native to Northern California, Aleese is excited to now reside in San Francisco where she has successfully transitioned from a career in traditional banking and investing to the ever expanding Fintech industry.  With the belief that financial technology will continue to disrupt more traditional investment techniques, Aleese is able to apply her experience and expertise to further enhancing the investor experience and deepening investor relationships in this industry.  Her varied background in lending, investing and relationship management provides a strong foundation for ensuring investor expectations are exceeded through the use of technology and data to make faster, smarter investment decisions in a traditionally relationship-driven industry.

Role

Leveraging AlphaFlow’s platform and Optimized Portfolios, along with her passion for assisting clients with financial needs, Aleese manages investor relationships providing all aspects of investment oversight. She has a particular depth in working with accredited investors and family offices, and her knowledge extends to the unique areas of complex wealth structures, portfolio management and custom credit.  Throughout the client relationship, Aleese fosters an approach that is deliberate, thoughtful and consistent.  She begins by listening to, getting to know and learning from clients about their financial goals.  Whether advising an investor who is new to private placements and/or real estate investing or working with an experienced investor in the real estate industry, Aleese discusses and channels the AlphaFlow offering as it aligns with each client’s goals.

Hobbies

Outside of the office, Aleese can be found enjoying yoga, playing tennis, hiking, exploring new restaurants in the Bay Area and wine tasting in the Sonoma and Napa areas.  She also has a passion for supporting the community through local volunteer efforts and is an active member of various non-profits throughout California.

Connect

Whether in the office or not, Aleese loves to make connections, share her knowledge and continually learn from others.  She is proactively reaching out to connect and introduce herself to all new and existing investors of AlphaFlow Optimized Portfolios.  If she hasn’t reached you yet, she will!  Please feel free to find a time to connect with her here: Schedule a call with Aleese Real Estate Crowdfunding   Crowdfunding means pooling money together from a group of people — the “crowd” — who have a common goal. There are 4 main types of crowdfunding: donation, reward, equity and debt. It can be financing a new project or business or even supporting someone who needs a medical treatment. Typically crowdfunding is done via the internet using platforms like Kickstarter, Indiegogo or Make A Wish (non-profit). Crowdfunding was always a logical distribution channel for real estate investments and existed for a long time in the form of hard money lending. Individuals were asking someone they knew (friends, family or professional network) for money to complete a project. With the passage of the Jumpstart Our Business Startups Act in 2012, many of the barriers that previously existed for investors in real estate were removed. You no longer had to know someone who knew someone to find a project to invest in, but could now find many projects sourced from different sponsors on websites.

Real Estate Crowdfunding and the JOBS Act

Jumpstart Our Business Startups Act (“JOBS Act”)  was signed by President Obama in 2012 and established new guidelines on how businesses could raise money through crowdfunding. In short, it made the process faster and simpler. After the law’s passing, real estate developers could use crowdfunding to fund their projects. Online Crowdfunding Platform  

Types of Real Estate Crowdfunding.

Real estate crowdfunding can be both equity and debt. In an equity investment scenario, the investor is a shareholder in a specific property while in debt they act as a lender. This chart summarizes key differences between equity and debt real estate crowdfunding investments:
 DebtEquity
Type of investmentLender to Property OwnerProperty Owner (shareholder)
ReturnInterest (Fixed)Share of net profits (Varies)
Return PotentialCapped, limited to the loan interest rateUncapped, can be in the double-digits
RiskLowerHigher
Secured byPayback of loan is either (1) secured by the property or (2) unsecured promisory noteUnsecured-You own real estate value after debt
Seniority Default1st to receive payout, but you may have to pay some of the foreclosure costs if loangoes into default2nd to receive payout
DistributionsYes, monthly or quarterly interest payoutsVaries, sometimes quarterly distributions are paid
FeesTypically 2% + possible loan origination feeTypically 1%–2%, no upfront or service fees
Holding periodVaries: 6–24 monthsVaries: 1–10 years
Tax benefitsNoYes, investors can tyypically take the depreciation deduction without owning the property directly
(Source Investor Junkie)

Who Can Invest?

Initially, only accredited investors could participate in real estate crowdfunding. For an individual to qualify as an accredited investor, one of two conditions must be met:
  1. net worth or joint net worth with the person’s spouse exceeding $1,000,000 not including the value of the primary residence.
  2. annual income of $200,000 in each of the two most recent years, or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income in the current year.
In October 2015, the SEC finalized its ruling on Title III of the JOBS Act allowing non-accredited investors to participate in some crowdfunding investments through provisions under Regulation A.

Benefits for Investors

Portfolio diversification Real estate crowdfunding allows investors to diversify their portfolio by investing in the real estate market which tends to be less volatile than stock market and reduces the potential of significant losses from market cycles. Liquidity Investors can find many different forms of real estate loans that fit their investing horizons, from short-term fix and flip loans to longer-term commercial mortgages. Transparency Investors have access to more information (compared to REITs) to be able to better evaluate opportunities. Small minimums Previously to invest in real estate deals, investors usually had to put up a minimum of $100,000 to invest in a project, but crowdfunding has helped to reduce that, with some platforms allowing investors to participate in a project with an initial investment as small as $1,000. Taxes For equity deals, you can potentially deduct expenses from your annual income tax. You should also be aware of the benefits of depreciation in real estate crowdfunding. As with all investments, it’s a good idea to consult with your accountant or Tax professional before investing!

Conclusion

Real Estate Crowdfunding solved a lot of problems for both investors and developers.

Problems Being Solved

Deal Sponsors / Developers
Investors
High Costs
Minimums are way too high
Tough to get access to capital
No access (“country club” deals)
Banking restrictions (Dodd-FrankOnly local exposure
Too small for institutional investors
Massive fees for REITs
Banks are too slowLower returns
Murky information

Real Estate Crowdfunding is a great opportunity to diversify your investment portfolio and may provide a steady stream of income to help supplement your current income, fund your next startup, fund your retirement, or fund your next adventure. Want to learn more about real estate crowdfunding? Read our tips for accredited investors.  
Disclosure: All data presented here is for demonstration purposes only. Past performance is not indicative of future returns. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Investors should consult with their own legal, financial, and tax advisors. While AlphaFlow strives to make the information in the article as timely and accurate as possible, AlphaFlow makes no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the contents of this article, and expressly disclaims liability for errors and omissions in the contents of this article.
  Evolution Of Hard Money Lending Investing   Hard Money Lending has been around for as long as real estate investing has existed. In its earliest form, Hard Money Lending was just an individual asking someone they knew for money to complete a project. Over time, these individuals evolved into small lenders, pooling several investor’s capital. Not too long after, private equity type firms with access to deep pools of capital became interested and started lending. After the JOBS Act in 2012, some real estate investors realized there was an opportunity to get individual investors more involved by bringing more transparency and the ability to diversify by buying parts of many different loans through online platforms. AlphaFlow takes the best aspects of working with a large group (like a private equity group) and online platforms by combining the deep knowledge of a private lender and the transparency and diversification offered by crowdfunding. Join us for a deeper tour of the history of Hard Money Lending!  
Join The Tour

Or click the image below: Infographic

Dashboard Update  

Updated Summary Section

We’ve updated our summary page to make it easier to see how your account is doing, by highlighting your total account value and your paid earnings. The “Total Account Value” graph makes it easier for you to see how your account’s value has changed over time, and the Portfolio Statistics summarizes your current allocations. Though the investment footprint is not a new feature of the AlphaFlow Optimized Portfolios dashboard, it is our clients’ favorite visualization tool! In a single shot, you can see where your loans are allocated across the country. Portfolio Summary

Click on the image to enlarge it.

New Analytics Section

Our new analytics section provides you with more transparency into your investment.  We’ve added a new panel to summarize what states your notes are in, and added a section that shows the servicing status of the notes in your portfolio. Missed payments are a fact of life investing in real estate. With many borrowers out swinging hammers and not at their computers, many perfectly healthy loans will miss some payments. This is why lenders don’t consider a loan in default until a borrower is 60 days late (delinquent) or more on a payment. Even then, it could be because they’re in the middle of selling or refinancing the property and are awaiting a payment before paying off all the back interest and the loan all at once.  Be assured, we’re always on top of our lenders to understand what’s going on with the loans in your portfolio, delinquent or otherwise! Top States and Note Status

Click on the image to enlarge it.

With the introduction of our monthly statements, we made it easier to understand what happened in your portfolio each month.  The “Account Activity” section takes a step further, and gives you a summary of each month’s activity in a single place, showing all account inflows and outflows! Monthly Activity Demo

Click on the image to enlarge it.

Disclosure: All data presented here is for demonstration purposes only. Past performance is not indicative of future returns. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Investors should consult with their own legal, financial, and tax advisors. While AlphaFlow strives to make the information in the article as timely and accurate as possible, AlphaFlow makes no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the contents of this article, and expressly disclaims liability for errors and omissions in the contents of this article.
 
I Want a Fully Optimized Portfolio
  AlphaFlow Optimized Portfolios   “Know what you own, and know why you own it.” – Peter Lynch This week marked a big milestone for us here at AlphaFlow, as we hit one year since launching AlphaFlow Optimized Portfolios! Our vision at AlphaFlow is to unlock the world’s opaque markets, and we do that by making it easy to invest in previously inaccessible asset classes. After launching the industry’s first multi-lender funds in 2016, AlphaFlow Optimized Portfolios (or “AOPs”) were about taking the next step and giving clients an unprecedented experience: an automated real estate investment platform. You make one investment, and we build you a diversified portfolio of real estate bridge loans. It’s that simple. One year later, the platform is working very well. Transparency is one of our core values and so we wanted to share some portfolio statistics and insights. To start, here is a bit about our last 12 months:

AlphaFlow Optimized Portfolios (as of 3/5/18)

AOP Stats   The missing statistics are our actual yield on our investments and total AUM. To produce our offering, we needed to become a registered investment advisor with a fiduciary obligation to our clients, meaning we’re bound to put your interests ahead of our own. Being a regulated entity comes with restrictions though, including those around showing performance, so we unfortunately can’t share these metrics. That said, our fiduciary duties align nicely with our culture of credit over volume. Our underwriting, led by our Director of Investments, Miles Deamer, has been conservative. The results speak for themselves: after one year our delinquency rate* is an astonishingly low 1.66%! To illustrate, you can see that our LTV actually decreased over time:  

Daily Weighted LTV

Daily Weighted LTV Our investments have been spread across the country, providing clients with tremendous geographic diversification:  

Current AOP Geographical Diversification

AOP Geographical Diversification   Our clients have been pleased, perhaps demonstrated best by the additional capital they’ve added to their accounts after launching their AOP. In fact, the average annualized growth rate of a portfolio after it’s been opened is 69% (ie clients are almost doubling down on their initial investment after experiencing the platform). Real estate bridge loans offer very attractive returns, but we’ve experienced the immense challenges that come with this asset class as well. Our 90%+ rejection rate tells you how much work we think it takes to find good investments. In addition, “cash drag” can absolutely kill returns. These loans typically have 12 month maturities, but we’ve found the actual average duration to be closer to 6.5 months and so making sure your money isn’t just sitting in your account and dulling your returns is critical. Our auto reinvest feature, which almost 80% of our clients use, makes this effortless and usually reinvests repaid capital within a matter of days. As we look to the next year, our focus is on a few areas: What else would you like to see? You can always reach me and the wider investment team directly at ray@alphaflow.com and invest@alphaflow.com, respectively. It’s been an incredible first year and we’re excited as we embark on the next step in our journey!  
I Want a Fully Optimized Portfolio
    *Delinquency rate defined as dollars invested in loans that are 60+ days delinquent on payment, divided by total active dollars invested.

About the author:

Ray Sturm, CEORay Sturm is a leading entrepreneur in financial technology, and is currently the CEO of AlphaFlow. Prior to launching AlphaFlow, he founded RealtyShares, one of the P2P industry’s top platforms for real estate investing. His early career in finance included investment banking at Bear Stearns, restructuring at Lazard Frères and private equity at CCMP Capital.

Ray has a BBA-Finance from the University of Notre Dame and a JD/MBA from the University of Chicago.

Legal Information and Disclosures This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. AlphaFlow has no duty or obligation to update the information contained herein. Further, AlphaFlow makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. AlphaFlow Advisor, LLC (“AlphaFlow”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumption on which such information is based.  This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of AlphaFlow.  Monday brought a huge market downturn, with the Dow dropping a record 1,175 points. Tuesday morning didn’t look much better, with the market dropping an addition 567 points at the opening bell. Things calmed down as the day went on, with investors rallying to end the day up 567 points. With everything going on, I wanted to share my thoughts on the recent stock market volatility, what it means, and where defensive investors might look to shift their capital. We don’t see the equity market volatility over the last several days as a signal of a larger economic contraction as much as it is a correction in the equity market. Typically, in the case of a greater recession, we’ll see credit spreads widen prior to seeing a drop in the stock market, which is not happening right now. Instead, this looks to be an equity correction combined with a flight to quality in other markets. This volatility has been driven primarily by the movement of an overheated equities market back to fair values and private credit strategies are looking increasingly attractive.  Accordingly, TIPS, Agency MBS, and US TSY should provide stability if the equity markets continue to fall.  If inflation emerges as the ultimate market bogeyman, TIPS are preferred over the others on this list.  For investors looking to stay in stocks and ride out an erratic market, low volatility ETFs become an attractive place to invest your portfolio, while equities with high recent price momentum become largely unappealing. REITs have significant exposure to the equity markets, and they also tend to have exposure to interest rates. If investors expect deflation or a falling interest rate environment, REITs perform well as income-producing assets. In a recession, REITs may in fact be more defensive than stocks as their earnings, and thus much of their value, are tied to long-term leases that remain in place regardless of market volatility. For investors looking to be particularly defensive, residential apartment REITs become more attractive while office and industrial park REITs become less desirable. And a shameless plug: AlphaFlow’s AOP product is a great hedge against volatile equity markets.  Contact us to learn more.
Disclosure: All data presented here is for demonstration purposes only. Past performance is not indicative of future returns. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Investors should consult with their own legal, financial, and tax advisors. While AlphaFlow strives to make the information in the article as timely and accurate as possible, AlphaFlow makes no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the contents of this article, and expressly disclaims liability for errors and omissions in the contents of this article.
 

About the author:

Chris Woida, Co-Chief Investment OfficerAs CIO of AlphaFlow, Chris is dedicated to finding systematic alternative investment solutions for all investors. He is on a mission to deliver cost-effective and transparent solutions to real estate and other private market investors. Prior to AlphaFlow, Chris was Managing Director, Head of Index Solutions, at Axioma where he led the expansion of its multi-billion dollar AUM index business into ETFs and equity options. Before Axioma, Chris was at BlackRock as a founding member of the FactorBased Strategies Group and the lead investment strategist for its flagship style factor hedge fund. During his tenure, Chris helped build the company’s smart beta and factor-based investing platforms and contributed to the design of the company’s first systematic fixed income ETF and alternatives mutual fund.

 
I Want a Fully Optimized Portfolio
  January 2018 Investor Letter   Shortly after the new year, we sent our clients our Quarterly AlphaFlow Investor Letter, sharing our thoughts on our industry and how we view the investment landscape today. You can find that letter below: Please click HERE to download a PDF of this January 2018 Quarterly Investor Letter.

Sailing into the Brume

“To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them — ideally, all three.” – Howard Marks With a new year upon on, I wanted to share some of my thoughts on our industry today, where I think things are headed in 2018, and what AlphaFlow is doing to get ahead of these market shifts. TLDR: We are still seeing a great deal of outstanding risk-adjusted return in the market, but the noise has increased and so both diversification and independent underwriting are more important than ever. In the second half of 2017, we commonly heard about the larger role institutional investors are playing in real estate bridge lending but there has been less discussion of what it means for retail investors. Institutional investors bring two unique attributes: (1) the need to put enormous amounts of capital to work, and (2) an ability to accept lower gross yields in exchange for volume, as they can often boost returns via leverage. Lenders and marketplaces are naturally incentivized to focus on volume, so we’re seeing changes in behavior:
  1. Rates are dropping industry-wide but to a greater degree with online platforms than we see with traditional offline lenders. In some cases, borrowers are capturing these savings as lenders use rate to win more business while maintaining spread (i.e. they still earn a 1-2% spread for servicing, even if they lower the rate). Elsewhere, lenders are increasing their spreads as they push the boundaries of what rate investors are willing to accept (we’re seeing many notes where borrowers are paying 11-12% and investors are being offered the note at 7-8%). In both cases, investors are experiencing diminishing returns.
  2. Loan amounts are being increased. Historically, lenders have taken the LOWER of purchase price or appraisal / BPO in setting a loan-to-value. We’ve seen this switched to taking the higher of these two metrics in order to maintain a particular LTV benchmark while actually lending more capital.
  3. LTV thresholds are being blown out. Lenders who have seen low defaults in particular borrower cohorts are making big bets that these DQ rates will continue, even with higher leverage, so they’re lending close to 100% of purchase price in some cases.
To loosely borrow from the derivatives world, we’re starting to experience our own version of basis risk, in which yields are not moving in line with the risk behind loans. The larger worry for all investors though is if we are straying into basis uncertainty, in which we’re not even sure if the data and processes we use to underwrite loans are any longer tied to loan prices (yields) at all (e.g. we’re seeing loans we rate as highly risky being offered at 7% and others we think are fairly low risk at 11%). In a consolidated market like stocks, basis uncertainty can mean it’s time to step away. In a fragmented market like ours though, it creates an opportunity for generating alpha (particularly as housing markets correct), as the market may be rife with mispriced debt (particularly with offline lenders). Looking ahead in 2018, three things jump out to me:
  1. Shift to secondary and tertiary markets. The doubling of the standard deduction should help boost homeownership demand in the Midwest and South, where few mortgages (or property tax bills) are large enough to warrant itemized deductions. For those on the coasts though, where a much higher percentage of mortgages fall into this expensive category, we’re going to see cooling home prices. We moved past the “lowhanging fruit” in many primary markets like LA and Chicago 18 months ago, which today means flips there usually involve more construction and lower margins for error. Add in the new tax bill, and investors need to look more to smaller markets like Pittsburg, Cleveland, and Kansas City for attractive loans.
  2. “When do I get my money back?” From questions about rising rates to a potential correction in the stock market, the market is filled in uncertainty that’s only being exacerbated by today’s geopolitical environment. The result: investors are looking to decrease the duration on their portfolios in order to give them the opportunity to appropriately rebalance their investments as circumstances shift. To address this need for clients, in Q1 we’ll likely develop a shorter-duration product with a guaranteed maturity.
  3. So much noise! From new behemoth institutional investors transforming the space to lenders contorting their standards to meet their needs, 2018 is going to produce a lot of noise in the market. We’re already rejecting over 90% of loans we review today, and while we think that number will decrease as we expand our relationships with traditional offline lenders, the investment environment is only getting cloudier.
We’re addressing these shifts in a number of ways, but I’ll highlight three initiatives here:
  1. Doubling Down on Analytics: In Q2 2017, we launched our internally built analytics platform, AlphaFlow Advanced Analytics, powered by an amazing partner in TheNumber. We recently expanded our work here and will be pushing out v2 in January to boost our ability to produce our own valuations (and thus LTVs) and better track markets as a whole.
  2. Improved Portfolio Management: We’re now building better portfolio management tools, which combine monthly reporting and property monitoring via our analytics platform to enable us to spot dangerous situations like market shifts before loans hit maturity.
  3. Clustering: Over the next year, we’re going to shift most of our investing to 12-15 target markets. Clustering not only allows us to drill in at the neighborhood-level to produce good returns, but also helps us mitigate downside. If you’re in this industry long enough, you need to be comfortable that at some point you’re going to own houses. Investors with the ability to manage assets (i.e. finish projects and fill homes with renters) will not only protect their downside, but also produce huge returns by positioning themselves to buy non-performing loans from lenders/investors who lack such capabilities.
There is more noise than ever in the market, but I believe the cycle has a long way to go in a number of cities around the country. Diversification is necessary but not sufficient in this fragmented market filled with bespoke underwriting practices and a lack of standardized metrics. Ultimately, we still see attractive risk-adjusted returns, but they require more work than ever to earn. Thank you for entrusting us with such an important part of your life. Happy New Year! Best regards, Ray Sturm Additional Note: I’ve heard from a number of you that you’d like us to write about the market more often, so we’ll plan to do so at least quarterly moving forward. We don’t claim to have a monopoly on market intelligence though. I’d love to hear what you’re seeing and what you think about the market in general, specific lenders, what you’d like us to do, or anything else you’re thinking about as you build and adjust your portfolio. Please click HERE to download a PDF of this January 2018 Quarterly Investor Letter.

About the author:

Ray Sturm, CEORay Sturm is a leading entrepreneur in financial technology, and is currently the CEO of AlphaFlow. Prior to launching AlphaFlow, he founded RealtyShares, one of the P2P industry’s top platforms for real estate investing. His early career in finance included investment banking at Bear Stearns, restructuring at Lazard Frères and private equity at CCMP Capital.

Ray has a BBA-Finance from the University of Notre Dame and a JD/MBA from the University of Chicago.

  Legal Information and Disclosures This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. AlphaFlow has no duty or obligation to update the information contained herein. Further, AlphaFlow makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. AlphaFlow Advisor, LLC (“AlphaFlow”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumption on which such information is based.  This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of AlphaFlow.  The Power of Reinvesting   Reinvesting earnings is a powerful tool that can help investors grow their wealth, thanks to a phenomenon called compounding. Warren Buffett once said: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”  What is compounding, and why is it so important to investors?  Well, we’re going to dig into that here.

What Is Compounding?

The simplest way of explaining compounding is that you are making returns on top of your returns.  I’ll use a simple example to help clarify:  say you make a $10,000 investment into a bond that pays 8% interest, semi-annually, meaning you receive a $400 payment twice a year.  Now, if you just took the two $400 payments, and assuming you don’t care about price changes in the bond, your return is 8% per year.   Pretty self-explanatory, right?  Well, what happens if you reinvest your first interest payment as soon as you receive it?  Your investing base (the amount upon which you earn interest) rises from $10,000 to $10,400 for half the year.  Now, if we multiply that by 4% (our 8% interest divided by 2 to account for the semi-annual payment), you now earn $416 on your second interest payment.

The Power of Compounding

That extra $16 may not seem like all that much, but here’s the difference that reinvesting can make over time: if you were to simply take the interest payments you received, it would take you 25 payments to double your money, or 12.5 years. If you reinvest your earnings, it would only take you 9 years instead.  If you had been reinvesting for the same amount of time it took to double your money without reinvesting, you’d have made an extra $6,700!

Click on the image to enlarge it.

For investors with a long-term investment horizon, those three extra years can add up.  With an investment horizon of 30 years, you’d make about 9.5 times your initial investment ($95,196.27 in profit), whereas if you just took the interest out, you’d receive less than 2.5 times what you initially invested ($24,000).

Click on the image to enlarge it.

Compounding With Stocks

From an stocks perspective, the S&P 500 returned roughly 79% over the past 10 years.  If we had reinvested dividends, that changes to 123%, and goes from a 6.01% annualized return up to an 8.3% annual return!  (Calculated from 11/20/2007-11/20/2017, Source)

Click on the image to enlarge it.

Compounding is an incredible tool in an investor’s arsenal for growing their wealth.  It’s not just useful to purely income generating investments, but to investments that have occasional cash flows as well.  The growth power compounding can provide is why AlphaFlow offers its investors the ability to have not just their repaid principal, but earnings reinvested as well.    

We’ve included a calculator that you can use to see the power of compound interest!

[CP_CALCULATED_FIELDS id=”9″]
Disclosure: All data presented here is for demonstration purposes only. Past performance is not indicative of future returns. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Investors should consult with their own legal, financial, and tax advisors. While AlphaFlow strives to make the information in the article as timely and accurate as possible, AlphaFlow makes no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the contents of this article, and expressly disclaims liability for errors and omissions in the contents of this article.
 

About the author:

Nick GiovacchiniNick Giovacchini is the Client Services Director at AlphaFlow. Prior to joining AlphaFlow, Nick worked for Barclays Risk Analytics and Index Solutions team, working with institutional asset managers to analyze risk and performance drivers of their portfolios. He also was an Account Manager for MarketFactory, a leading technology provider for the FX world.

Nick has a BA in Political Science from George Washington University in Washington, DC.

I Want a Fully Optimized Portfolio
  Reinvesting earnings is a powerful tool that can help investors grow their wealth, thanks to a phenomenon called compounding. Warren Buffett once said: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”  What is compounding, and why is it so important to investors?  Well, we’re going to dig into that here.

What Is Compounding?

The simplest way of explaining compounding is that you are making returns on top of your returns.  I’ll use a simple example to help clarify:  say you make a $10,000 investment into a bond that pays 8% interest, semi-annually, meaning you receive a $400 payment twice a year.  Now, if you just took the two $400 payments, and assuming you don’t care about price changes in the bond, your return is 8% per year.   Pretty self-explanatory, right?  Well, what happens if you reinvest your first interest payment as soon as you receive it?  Your investing base (the amount upon which you earn interest) rises from $10,000 to $10,400 for half the year.  Now, if we multiply that by 4% (our 8% interest divided by 2 to account for the semi-annual payment), you now earn $416 on your second interest payment.

The Power of Compounding

That extra $16 may not seem like all that much, but here’s the difference that reinvesting can make over time: if you were to simply take the interest payments you received, it would take you 25 payments to double your money, or 12.5 years. If you reinvest your earnings, it would only take you 9 years instead.  If you had been reinvesting for the same amount of time it took to double your money without reinvesting, you’d have made an extra $6,700!

Click on the image to enlarge it.

For investors with a long-term investment horizon, those three extra years can add up.  With an investment horizon of 30 years, you’d make about 9.5 times your initial investment ($95,196.27 in profit), whereas if you just took the interest out, you’d receive less than 2.5 times what you initially invested ($24,000).

Click on the image to enlarge it.

Compounding With Stocks

From an stocks perspective, the S&P 500 returned roughly 79% over the past 10 years.  If we had reinvested dividends, that changes to 123%, and goes from a 6.01% annualized return up to an 8.3% annual return!  (Calculated from 11/20/2007-11/20/2017, Source)

Click on the image to enlarge it.

Compounding is an incredible tool in an investor’s arsenal for growing their wealth.  It’s not just useful to purely income generating investments, but to investments that have occasional cash flows as well.  The growth power compounding can provide is why AlphaFlow offers its investors the ability to have not just their repaid principal, but earnings reinvested as well.    

We’ve included a calculator that you can use to see the power of compound interest!

[CP_CALCULATED_FIELDS id=”9″]
Disclosure: All data presented here is for demonstration purposes only. Past performance is not indicative of future returns. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Investors should consult with their own legal, financial, and tax advisors. While AlphaFlow strives to make the information in the article as timely and accurate as possible, AlphaFlow makes no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the contents of this article, and expressly disclaims liability for errors and omissions in the contents of this article.
 

in ar·rears /əˈrirz/

Interest earned in one month is paid out during the following month.
Example : You transfer money to AlphaFlow on October 30th and Alphaflow receives the funds on November 2nd. AlphaFlow has you fully invested in 75 loans on November 9th. You begin accruing daily interest on those loans on November 9th, and receive your November earnings on December 31st.
Note: this is an example to illustrate typical earning cycles, and may change based upon each individual lender.
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