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OP: March 02, 2017, 12:00:00 AM
So, I thought I at least had a rough understanding of how LC was computing NAR. However, today I see that even though my "Adjusted Account Value" is slightly below the value of the single ($5000) deposit I made about 18 months ago, the Adjusted NAR is (slightly) greater than 0:



What explains this? Is it taking into account some pending payment that hasn't shown up in the cash balance yet?
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#1: March 03, 2017, 12:00:00 AM
$4,999.47 + $14.52 available cash
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#2: March 03, 2017, 12:00:00 AM
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#3: March 03, 2017, 12:00:00 AM
Link to a nice explanation for why a time-weighted rate of return can be negative for a gain or positive for a loss.

The basic idea is that time-weighted rates of return abstract away from account size. Put another way, a time-weighted rate of return presumes that you had the same amount invested at all times. If, for instance, one has good returns on a relatively smaller amount of money and then bad returns on a larger amount of money, one might have a dollar loss with a positive rate of return.

OP (mrwhizzard) indicates a single deposit. If there were no withdrawals and no Folio purchases, then my guess is that: (1) OP's portfolio had modest gains; (2) OP reinvested the gains; and (3) OP's portfolio then suffered losses on the larger balance that more than offset the original gains.

Here's a quick, extreme hypothetical for illustration:
  • Invest $1000.
  • Portfolio doubles in first year.
  • Portfolio loses 55% in second year.
  • New balance is $900 for a 10% loss...
  • ...but the time-weighted rate of return is a little over 20%.
LC's discussion of their formula suggests a couple of other anomalies, but the formula basically looks sound. It accounts for the real cash flows, including LC's fees, and excludes accrued interest.
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#4: March 03, 2017, 12:00:00 AM
Thanks for the links and example, they were informative.
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#5: March 03, 2017, 12:00:00 AM
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#6: March 03, 2017, 12:00:00 AM
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#7: March 03, 2017, 12:00:00 AM
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#8: March 03, 2017, 12:00:00 AM
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#9: March 04, 2017, 12:00:00 AM
I don't understand the formula entirely. Oh, I can read it, the trouble is it doesn't all make sense. However it appears to me that the ANAR is a most-recent-month figure. The Adjusted Account Value is the result of all gains and losses over the history of the account, adjusted for the status of notes. Thus there's no reason they should be even closely correlated.

The "to the twelfth power" tells me that this is a single-month calculation. Raising it to the twelfth power is to annualize it.

And I assume the sums are "over all active notes in the account". (It cannot include paid-off or charged-off loans, since the principal on these is zero and would result in a divide by zero.)

I don't understand the "Principal[¡]/Principal[¡]" inside the sum in the numerator.

Then the Note Status Adjustment Amount (NSAA) is only a single value -- it's not inside the sum -- and so is not a per-note adjustment. And yet it has a subscript -- it's the NSAA for the N-th note. This seems lot a (rather large) bit of hand-waving, since it's obviously in fact an adjustment for each note status.

So what I make of the formula is:
  • Sum all credits and debits for the account, excluding deposits and withdrawals.
  • Subtract a separately calculated status adjustment amount.
  • Divide by the total principal in the account, resulting in a monthly rate of return.
  • Annualize.
(Describing it this way also avoids the issue of notes with zero principal.)

I see no indication that past months feed into the ANAR at all. And as others have noted, we don't know when the ANAR is calculated -- or for that matter, what month is used for the calculation, even whether it's a calendar month, the past 30 days, the last full month since the account was opened, or something else. (Someone who has watched their ANAR daily could probably answer this.)

We all notice large swings in the ANAR depending on what has happened in the past month, which fits with it being a single-month calculation.

OTOH, the anomalies I noted above make me distrust the formula. If I were told to code that formula -- and I'm retired from over 40 years of programming -- I would press for answers related to the points above. I would say what's the sum over -- if it's all notes in the account, then I have a divide by zero. I would say why do you have P[¡]/P[¡] inside the sum. I would say where is this "Note Status Adjustment Amount" coming from and why is it subscripted when it's not inside the sum. That's a mighty lot of questions for a little formula.

Edward
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#10: March 05, 2017, 12:00:00 AM
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#11: March 06, 2017, 12:00:00 AM
ANAR and adjusted account value have always been a little bit of a mystery, but this thread has helped me understand it better. The more I think about it, the more I think it makes sense, and I also think the formula is the truest approximation that can be given. I don't think there is any contradiction with the $5k initial deposit, an adjusted account value of approximately $5k, and an ANAR of .17%. Here is how I see it:

1) An investor makes a deposit into LC.
2) LC funds are used to select notes to invest in.
3) Each note has its own interest rate; the sum of all interest rates is the weighted average.
4) The actual return can only be known in retrospect and after all loans have either been paid off or charged off.
5) In the interim, one way (is it the best?) to approximate the return given the uncertainty of future payments is to sum all payments and adjustments as a percentage of principal and then annualize it.
6) The adjusted account value is an extrapolated amount based partly on your current payments and partly from loss assumptions from LC platform based on the trailing 9 months.

The ANAR and adjusted account value are kind of just projections, but they have some validity because it uses historical 9-month loss assumptions. But it is still fairly uncertain, and your exact loss rates will not match the LC platform as a whole. Mathematically, the fact that you had an initial deposit of $5k and an adjusted account value of roughly $5k doesn't mean that ANAR should be 0%.

Here is another way to think about it: take the sum of all your payments to-date, less adjustments (charge-offs and service fees), and apply some adjustment amount to take into account future charge-offs. This will give you a monthly return. Annualize it and then apply it to your note principal for the remaining life of your note amount and you will get some other number (i.e., adjusted account amount). This other number, when compounded at an .17% for the time period of your weighted note terms, just happens to be astonishingly close to your initial investment amount. This isn't evidence that the formula is overestimating anything at all or being misleading, it's just dealing with uncertainty in the way it was designed.

You actual, after-the-fact return will of course be different than what you see here, but this can't be known until all notes have run their full course, and at that point it's a very simple calculation. This is just an interim approximation. The easiest way to see how fickle the ANAR is and adjusted account amount is to tweak it yourself:

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#12: March 06, 2017, 12:00:00 AM
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#13: March 06, 2017, 12:00:00 AM
Interestingly, I now see the exact opposite: adjusted account value shows a (slight) gain, but ANAR now shows a (slight) loss:

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#14: March 08, 2017, 12:00:00 AM
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