All other things being equal, diversifying an investment portfolio across multiple independent investments improves the risk / return ratio of the portfolio by reducing the risk of a large loss (aka volatility) from the portfolio without reducing the mean return. Articles on modern investment theory can explain better than me how to value the risk / return tradeoff and the genuine value added to a portfolio by diversification.
Yes, the benefit of diversification needs to be set against the downside of increasing the effort needed to effectively manage the portfolio.
There was a question regarding diversification on the RBS appropriateness test. Should you Diversify more to reduce risk?
I assumed that the answer that was marked correct would be that it is less risky if you diversify more.
Probabliity says there's no difference in the long run if it's random.
if one assumes that Due Dilligence is a good idea then diversification would seem to be bad.
I'm thinking that better advice, for RBS specifically, may be to spend your time on due dilligence rather than diversification.
I follow diversification strategy. I don't have an expertise to predict the future of each borrower and there were many testimonies on this forum from people who got it wrong with various loans across self-select platforms/accounts. One stuck in my memory - somebody joined FC and invested 5k in 6 loans that they thought are sound, all 6 defaulted soon after going live...
I've been with ReBS for nearly three years. Invested in almost every single new loan since then, my net return is 11% so far.