Diversification - what % do you lend against any one loan?

2 years ago, shortly after retiring and having my financial advisor look at my pensions, investments and available cash, I was keen to improve my savings income. When my bank reduced the interest offered on my bonds, I decided to get into p2p but found very few sites that I felt comfortable with. W, SS, FC and FS became my first, with W getting 65% of my available cash, SS got 30%, FC got 3% and FS because of their lending restrictions on loans at that time got the remainder. This resulted in me having loans on SS where my individual loan investment was as high as 30% of the money lent on that site. As the number of loans on SS have increased, I have / am able to reduce that to around 2% per loan of my total p2p investment. I have withdrawn from both W and FC and reduced my money on FS considerably, with the aim to be out by late May. I have now added MT, FK, FE, ABL, AC, LI and LC to the platforms I have money in. My aim is to try to keep individual loans down to around 2% or lower of my total p2p investment. I currently have 120 loans, although this has been as high as 160 and I see this eventually stabilising at around 140 on 7 platforms.    


That sounds like a lot of hard work, good job you are retired.

I think diversification needs to take into consideration risk. I mean counterparty risk. If I have mortgage loans with a LTV < 30 %, I feel fine with maybe 5 investments. If I go to consumer finance like Bondora, and without buyback guarantees, it's probably safe to spread your investment at least among 100 loans. I have spread over more than 200 on Bondora and also on Mintos and Twino. On Mintos I have spread among all the grantors of buyback guarantees.

More generally speaking, I have now 0,5 % of my assets in P2P lending. On operational risk, I think it's wise to have a minimum diversification also. I spread it over 6 platforms and maybe 1'000 loans. It's partially in EUR and partially in £ (I am EUR based; but you never know what happens to the EU and the EUR if a BREXIT happens) I will pass my investments to 1 % in 2 months when I have reimbursments of a couple of bonds. I'm thinking of possibly increasing to 5 % of my overall assets over the next year when I have more and more reimbursments of bonds.

Looks like I differ from most.

I've went as high as 50% in a single loan (the Wyk**am School loan on AC) because of the solidity of the security, although generally I cap loosely at 10%.

Diversification protects the downside, but also dilutes the upside. Diworsification, anyone?

I suppose it all comes back to risk/reward. I've still got most of my working years ahead of me and no dependents to support (yet!) so can afford to make mistakes/adopt a higher risk approach. 

I don't really set an explicit maximum % per loan based on the size of my P2P portfolio. Instead, I focus on a max size of 0.2% per loan vs. my overall asset base. Given an overall cap of 10% of NAV for my P2P portfolio, that implies a minimum of 50 loans if I reach my cap. I would argue that somebody with 50% of their net worth probably needs to be more widely diversified on a per loan basis than someone with 5% of their net worth. The reality, however, is that I'm now over-diversified with something closer to 200 loans across various platforms. The positive is that over 80% of the risk is focussed in around 50 loans with the other 150 loans containing the residual. 

I view diversification as about constructing a portfolio, hopefully still with the same risk-return ratio, but with a lower or zero correlation to reduce concentration risk/idiosyncratic risk. I see little point, however, accepting an inferior return proposition just to create a (potentially) lower correlation. Moreover, given many of my loans are based on property security, I see a fairly substantial slug of systemic risk which is not easily diversified away. Hence I'm currently trying to exit minor positions since they simply aren't worth the return per unit effort and (by sizing) I view them as inferior to the larger positions. For example, on a higher risk platform like SS there are probably now only 5-10 loans I actually want to own.

Outside of my P2P portfolio, I have 35% of my net worth in a single fund. Add to that 15% in my primary residence and around 50% of my net worth is in just two assets, which hardly counts as diversified. To me this is balanced by the fact I have more conviction on the single large investment and it's uncorrelated with the rest of the portfolio. I