With much of the UK sweltering in the record-breaking Bank Holiday heatwave, a timely economic lesson about diversification arrives from Madagascar.
This tropical island nation, in the Indian Ocean off the coast of East Africa, supplies about 80% of the world’s vanilla, with much of that finding its way into ice cream cones around the world.
However, prices of the flavouring, derived from vanilla orchids, have been soaring because a large proportion of Madagascar’s crop was damaged last spring when a huge cyclone tore through the country.
Pure vanilla cost about $60 per kilogram in 2014, but the price has now risen to about $550 – that’s more than a kilogram of silver.
Suppliers expect prices to stabilise this year, but many food manufacturers, including bakers and ice cream makers, are having to cut costs elsewhere to pay for their vanilla. Others are experimenting with different flavourings or even taking vanilla off the menu.
Agriculture, including the production of vanilla, plays a crucial role in the economy of Madagascar. According to the World Bank, 74% of the country’s workforce was employed in the agriculture sector in 2017 – that compares with the global average of less than 27%.
When a country is overly reliant on one sector or product, a single storm can have a severe impact on its economy. The same lesson applies to investing – if too much of your portfolio is held in one asset, you risk suffering losses that could have been avoided if you had diversified and spread your assets more widely.
Keep cool and diversify
At LendingCrowd, we believe that diversification – not holding all your eggs in one basket – is the best way to manage risk in your portfolio. However, researching and choosing which business loans to invest in can be a time-consuming process when it’s done manually. You also have to make sure you’re reinvesting your proceeds to avoid having cash sitting idle in your account.
By opting for our “passive” Growth Account or Income Account, your investment will be automatically diversified across all the loans available on our Loan Market. Your repayments are also reinvested automatically, further increasing your portfolio’s diversification.
Our Growth Account and Income Account are also available within our Innovative Finance ISA for tax-free* returns. Keep cool and think outside the bank with LendingCrowd.
*Capital at risk. Tax treatment depends on the individual circumstances of each investor and may be subject to change in future.