optimist
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Post by optimist on Dec 7, 2019 19:05:20 GMT
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.
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david42
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Post by david42 on Dec 10, 2019 12:56:32 GMT
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.
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optimist
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Post by optimist on Dec 13, 2019 19:31:31 GMT
Diversificatoin outside of RBS reduces risk, but all things are not equal, there are no other 20% return P2P investments that I'm aware of, so the potential mean return will be affected.
This is the risk / return tradeoff. I only meant within RBS though.
Within RBS, with a small number of loans, there is an additional risk of selecting poor loans in an attempt to diversify within the platform
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Post by df on Dec 13, 2019 20:57:57 GMT
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.
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optimist
Member of DD Central
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Post by optimist on Dec 14, 2019 14:32:26 GMT
Hi DF, I think there is probably a sweet spot where the systemic and individual risks balance and are minimised. If we buy equal amounts of each loan (proportional to loan size) we are guaranteed the average return for the platform, this is good at the moment
Averaging protects against random fluctuations, but can mean we get hit by systemic market and platform problems as well as bad borrowers.
RBS advises that lenders should do Due Dilligence. I've seen 4 defaults, 1 fraud and 2 suspended trading, out of 25 loans I considered risky, in 6 months.
In FC, I went for the most risky loans as I calculated that the improved profit outweighed the losses. DD actually lost you money. On RBS I think the risks are higher and DD is worth doing.
If DD works, it is possible to reduce risks, by avoiding the worst loans. Sometimes we will make mistakes or be unlucky and do worse than the platform but more often we should do better.
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