What is diversification and why should I diversify my portfolio?
Diversification simply means investing your money into lots of different loans, to spread your investment risk as broadly as possible. There are several things you can do to help reduce the risk of lending, but it’s important to remember that there will always be risk involved in this type of investment.
Diversifying your portfolio by lending smaller amounts to lots of different businesses will help reduce the impact of any bad debt on your overall investments. The greater the number of investments you have, the lower the effect of bad debt on your portfolio.
While LendingCrowd has not had any loan defaults to date, we know that this is bound to happen, so we have produced the following estimated future default rates for each Credit Band to help you decide which loans you would like to invest in.
|Credit Band||Estimated Default Rate|
How can I diversify my LendingCrowd investment portfolio?
The Loan Exchange, our secondary market, allows you to instantly invest in loans that have previously been successfully funded through loan auctions. You can lend to these businesses immediately, without having to wait for a loan auction to finish, and you will start accruing interest on the day you buy the investment. This makes the Loan Exchange a great place to start for both new lenders who are looking to spread their investments across multiple loans and existing investors who want to increase the number of businesses they are lending to.
There are currently around 30 different investment opportunities on the Loan Exchange which include a variety of business sectors and Credit Bands to give you a wide range of loans to invest in.
You can learn more about how the Loan Exchange works in our Loan Exchange blog post.
What should I remember when diversifying my investments?
The first thing to remember is that you should read all the information about each loan carefully before you decide whether you want to invest in that loan. We provide information about each business and why they are seeking funding, detailed financial information, and independent credit scores to help you make an informed choice about which businesses to lend to. You can also ask questions to the borrowing companies to help you get more information.
Lending to a wide number of businesses is the best way to spread your investment risk and help reduce the impact of a default, but there are a couple of other things you should keep an eye on to make sure that this diversification is as broad as possible.
It is important to make sure that you are investing in multiple businesses, as well as in multiple loans. Businesses may have more than one loan, and investing in multiple loans for the same borrower could have a higher overall impact on your portfolio if the business becomes unable to repay.
You should make sure that you are lending to businesses across a variety of sectors, to reduce the likelihood that an event negatively affecting one sector will impact on your investments.
We also encourage lenders to invest in loans across different Credit Bands and loan terms, to make your investment portfolio as varied as possible.
Following these steps when diversifying your investments will help reduce the overall impact of bad debts on your portfolio, but you should keep in mind that your capital is at risk when investing.