Via Calculated Risk, Doug Short has a series of charts comparing the movements of various bear markets. The one below compares the Dow starting in 1929 (Great Depression), the S&P 500 in 1973 (Oil Crisis), S&P in 2000 (Tech Crash), and the current bear market starting in 2007 (do we have a moniker yet?).

Click on image for larger version.

I wouldn’t read too much into them, although I do have a thing for pretty charts. 😉 If anything, I suppose we should be prepared for at least another year of fun:

Reinhart and Rogoff mention a three-and-a-half-year average peak to trough decline in equities for past financial crises. As of today, the market peak of October 9, 2007 was about 16 months ago — which would put us well shy of the half-way mark for the average crisis.

Back in December, I wrote a detailed review of the “new” LendingClub, a site which lets individuals lend money directly to other individuals and earn 7-20% interest (depending on credit scores). Many of you sent additional questions about LendingClub, and Rob Garcia, Director of Product Strategy, was gracious enough to answer them. I want to thank Rob for his time and candidness, as some of the questions were quite blunt. 🙂

Some of my readers are concerned about your company being in its early stages. What would happen if Lending Club goes bankrupt? What would happen to our notes in that scenario? Would we be unsecured creditors of LC?
Yes the notes are unsecured obligations of Lending Club. That being said, we’ve structured the program in a way that makes it as “bankruptcy remote” as possible: all lender funds are kept in a trust account that is not part of Lending Club assets, and therefore would be off-limit to other Lending Club’s creditors. We also have a back-up servicing agreement in place with Portfolio Financial Servicing Corporation (www.pfsc.com), one of the largest loan servicer in the country, who will service the loans should Lending Club be unable to do so.

Any insight to why the income and net worth requirements are somewhat restrictive for lenders?
This comes from state regulations; most states impose financial eligibility requirements for clearing new types of securities offerings. We are hoping that some of these requirements will be lifted as the program continues to build its track record. As pointed out in a recent Javelin study, the average annual return for Lending Club lenders has been 9.05% over the last 18 months, with little volatility. If we continue showing that sort of track record over a long period of time, we hoping the financial eligibility requirements will become unnecessary.

Do you expect to add more eligible states soon?
Yes. We are actively pursuing registration in states where the offering has not yet been cleared. Note that residents of most states who haven’t been cleared for the main offering can already buy notes on the Note Trading Platform from FOLIOfn.

Can I just take the current $25 bonus and run? [See below]
You certainly can, although we’d love you to try Lending Club.

Is there plans to fund via PayPal or some other more instant form of funding? I saw a loan I wanted last week, but had to wait 4 days for my bank deposit to clear and missed it.
We do offer this capability, but only to lenders who do not have a linked bank account. Once a bank account has been linked, it is a lot more cost-efficiently (although admittedly longer) to move funds by ACH.

Any plans to pay interest on idle cash?
Not immediately. Believe it or not, there are lots of regulatory challenges for a non-“deposit taking institution” like Lending Club (basically not a bank) to pay interests on idle funds. It is in our interest to do so to attract more lenders, so we are looking for a way around (along the same vein as what PayPal is doing) and are confident it will come through.

I have several old loans from Lending Club still in repayment. However, after the new regulations, I am no longer eligible to lend due to both my state of residency and income. Any idea what might happen to my loans? I don’t want to ask Lending Club in case they close my account…
No worries; we’re not closing anybody’s account! All “old” loans continue to be serviced and all lenders get their monthly payments credited to their account irrespective of their state of residence. The new restrictions only restrict the ability to buy new notes.

— End of Interview —

Follow-up Updates and Comments
Here is a excerpt from the Executive Summary of the noted Javelin study, which notes both pros and cons:

If an individual had invested $10,000 on June 1st, 2007 in a representative group of loans on the site, the value of that individual’s account at Lending Club would have grown to $11,594 by November 2008 (assuming reinvestment of payments received). That return would have outpaced other common investments or indexes such as the Standard & Poor’s 500 Index ($6,289), the Nasdaq Composite Index ($6,605), 1-year CDs ($10,678) and 6-month Treasury bills ($10,501). This comparison factors in Lending Club’s 1% service charge but does not include fees and other transaction costs for the other investments. This comparison does not factor in differences in liquidity between Lending Club notes and the other investments or indexes. Notably, Lending Club notes can only be sold through the Note Trading Platform that was made available recently (on October 14, 2008) and there is no assurance that liquidity will develop on that platform.

Over the last few months, we have seen credit card companies canceling inactive cards, reducing credit limits, and raising rates on lots of borrowers. As a result, I have definitely seen a rise in loan volume at LendingClub.

As a lender, I’ve tried to take advantage by slowly investing in lots of small $25 loans to folks with squeaky-clean credit histories and good job histories, and now have about $1,000 lent out. I understand there is risk involved, and will report my results. I do wish the PayPal funding option was always available, as the convenience would be great. Also, another reader pointed out that if they accepted PayPal, one could fund with a credit card for the rewards.

If you are interested in lending, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t have to deposit anything. After you are approved, the $25 should show up in your account balance, and you can lend it out immediately.

Zecco Trading announced on Friday via e-mail that they will be raising the minimum requirements to receive free trades on their accounts starting next month. Thanks to everyone who also alerted me.

Dear Zecco Trading client,

I’m writing to tell you that as of March 1st, 2009, we’re increasing the minimum level of assets needed to earn 10 free trades per month to $25,000. We’re also adding a new way to get free trades: customers who make at least 25 total trades per month will also qualify for 10 free stock trades per month.

Bummer! The change is blamed on current economic conditions, which is understandable, but also I fear for their community model. Their vibe up until now has seemed to include a lot of younger investors who are just starting out. $25,000 is a pretty high hurdle.

The upside is that since their last fee schedule change, their customer service and website has indeed improved over time. I just feel like they are split between customers like me who just want a bare-bones free system, and those who want “the kitchen sink” and free trades. I guess the latter isn’t realistic.

So now what?

Exploring Staying With Zecco

Small balances. If you trade less than 25 times per month, you pay $4.50 per trade. Still small, but not free. 🙁 If you make 25 trades per month at $4.50, but get 10 of them free, that works out to an average of $2.70 per trades. This isn’t the worse deal out there, but at this price point there are closer competitors now (see below).

Move assets over. The $25,000 applies to net assets. So if you have $25,000 in ETFs or other stocks in another brokerage that are idle, you could move it over and just leave it at Zecco to qualify for the free trades. One possible idea is to invest in a short-term bond ETF like PVI to maintain the minimum.

Exit Plan Options

Liquidate and close out your zero balance account. To avoid the $50 ACAT transfer-out fee for moving your entire Zecco portfolio somewhere else, you can sell all your positions, transfer out the cash, and then have them close the account. During February you’ll still get 10 free trades if you reach a $2,500 net asset balance anytime during the month. You may have to worry about realized tax gains and/or losses with this method.

Transfer to another brokerage with fee rebates. Several other brokers offer a rebate of the ACAT transfer fee if you move enough assets to their brokerage. Unfortunately, most brokers that I have found set the minimum transfer amount to be of $25,000 in assets (FirsTrade, SogoTrade, Scottrade).

However, TradeKing brokerage will credit your transfer fees if you move just $2,500+ over to them. They offer $4.95 trades with no minimum balance requirement. For more details, see my TradeKing review here.

TradeKing will credit your account transfer fees up to $150 charged by another brokerage firm when completing an account transfer for $2,500 or more. Offer applies to new non retirement accounts funding for the first time.

Other Deep Discount Alternatives
Here are some more brokers with rock-bottom commissions. Rates are for non-IRA accounts.

Wellstrade, the brokerage arm of Wells Fargo, offers 100 free trades per year if you have a net asset balance of $25,000. However, you’ll have to open up a PMA checking account and keep some activity going in their every month or so. If you don’t, they’ll close the checking account and you’ll lose the 100 free trades.

Just2Trade offers $2.50 trades with a $2,500 minimum account balance. It is targeted at “experienced investors”. To get approved for an account, you need to state that you have 2+ years of investing experience and know how to use margin, amongst other things. Electronic statements are free, paper ones are $5 per month.

SogoTrade has $3 trades with a $500 minimum. Electronic statements are free, paper ones are $5 per month.

Of course, low commissions shouldn’t be the only consideration for a brokerage firm, it just depends on what you are looking for. I may need to move my “fun money” account elsewhere now.

Stumbled across another interesting chart from Fidelity Investments showing stock market performance during and after previous recessions:

Found via the Financial Philosopher, who stated:

Now that we are “officially” in a Recession, what does that mean for stocks going forward?

Of course, no one really knows the answer to that question, and I certainly will not attempt to do so here. What some of you may not know, however, is that, once the “recession call” is made, stocks have historically been quite close to a significant march upward.

The reason for this is that economists look backward and investors look forward.

I have no idea if this will hold true, but according to the National Bureau of Economic Research, this current recession began in December 2007.

Larry Swedroe, principal of an asset management company and investment book author, also posted his Lessons That 2008 Taught Us In 2008 on SeekingAlpha. It was a nice compilation that covered a variety of topics from active management to Madoff to your “Plan B”.

Here are some excerpts of a few lessons involving investing and your portfolio:

Don’t forget that companies that managed money themselves were often the victims this year!

Lesson 1: Neither investment banks nor other active managers (including hedge funds) can protect investors from bear markets. […]

If their money managers could protect you, why did firms like Lehman Brothers and Bear Stearns go belly up and Merrill Lynch have to be rescued by Bank of America? It is in the best interest of these firms to manage their risks well. Yet, they have clearly demonstrated that they cannot. As evidence of their lack of ability to forecast events consider that in 2008 Lehman spent $751 million buying back its own stock at an average price of $49.60 and Merrill Lynch spent $5.27 billion buying back its stock in 2007 at an average price of $84.88.(2)

Lots of other historically renowned and recommended active managers had a bad year as well.

Lesson 6: One of the more persistent myths is that active managers can protect you from bear markets. In 2008, the hardest hit sector was financial stocks. Financials comprise a significant portion of the asset class of value stocks. As benchmarks for the active managers we can use the Vanguard Small Value Index Fund that lost 32.1 percent and the Vanguard (Large) Value Fund that lost 36.0 percent.

The following is a list of the returns of some of the actively managed mutual funds with superstar value managers, four of whom were named by Morningstar in June 2008 as their recommendations to run value superstars, their recommendations (those are noted with *): Legg Mason Value Trust lost 55.1 percent; *Dodge & Cox lost 44.3 percent; Dreman Concentrated Value lost 49.5 percent; *Weitz Value lost 40.7 percent; *Schneider Value lost 55.0 percent; and *Columbia Value and Restructuring lost 47.6 percent.

Of course, some actively managed value funds beat those benchmarks. However, how would you have known ahead of time which ones they would be?

Some did guess this would happen. But was it luck or skill?

Lesson 9: There is a great likelihood that each time there is a crisis, some guru will have forecasted it with amazing accuracy. But that ignores two important facts. The first problem is that even blind squirrels occasionally will find acorns. In other words, there are tens of thousands of gurus making forecasts all the time.

Vacation is over, bring on 2009! Time for a quick look back. Instead of accounting for all my various cashflows, I decided to first review how the individual mutual funds in my investment portfolio did during 2008. (Data taken from Morningstar.) Here are the numbers along with the breakdown by asset class:

Just about every asset class related to equities was in the toilet, especially emerging markets. The bonds held their ground overall. I had a relatively aggressive mix of 85% stocks and 15% bonds, with an overall weighted return of -33.2%.

As a reference, the total return of the Vanguard S&P 500 Index Fund (VFINX) was -37% while the Vanguard Total Bond Market Index Fund (VBMFX) was up 5.1%. The Vanguard Target Retirement 2045 Fund (what I used to own) had a 34.6% drop.

Did I hold too much in stocks? I don’t think so. I’m only 30 years old right now, and if I’m lucky I’ll have potentially another 55 years in the market.

On the other hand, I do think that some retirees and near-retirees held too much stocks. “You need at least 60% in stocks at all time?” *Cringe*. Take the Vanguard Target Retirement Income Fund (VTINX), which is an all-in-one fund with an “asset allocation strategy designed for investors currently in retirement.” For 2008 it dropped only 10.9% with an asset allocation of 5% cash, 30% stocks, and 65% bonds. This is probably more appropriate for people in the withdrawal stage – something to sleep well with!

So, I am stuck trying to resolve two somewhat conflicting feelings. The volatility didn’t really worry me that much this year, and am happy to take some risk right now. But I also know that I don’t want to take risk later. I may need to shift my asset allocation towards more bonds faster than 1% per year, especially if I am going to retire early.