The math related to investment diversification

You don't get less risk.
What you get is less deviation propability from the average risk.

To make it obvious: Assume that the average defaulted amount on a platform is 2.3% of lent money.
If you have only 2 loans, it is most likely that you end up with either 0%, 50% or 100% default (ignoring partial defaults for this example)

Therefore with few loans you have a high probability of producing an outlier.

Usually aim for at least 100, better 200 loans.

P.S.: check this article/graphic for a good visual explanation
www.lendingclub.com/public/diversification.action

Hi, I am very much new to p2p and would like to know how are people managing to undertake diversification of this magnitude?

I appreciate the level of return is based on my attitude to risk, but what tips are there to get loans up in the 100s, what platforms are better at diversifying with generic accounts, etc.?

Thanks in advance

Take your time and don't expect to be fully diversified for several months. Try lots of platforms with a small amount to start with until you work out which work for you.

I have mixed feelings about diversification. It was probably what I saw as the highest priority when I set out, but after a few months it became apparent that unlike stocks and shares, you can to some extent pick losers and winners in P2P, especially the losers. I'm not advocating ignoring it, but if you have the opportunity/time/interest to, I'd still say it's worth a critical look at the proposals and/or this forum. This will happen naturally anyway, as when you hit your first bad eggs, it's human nature to want to find out what went wrong and whether it was foreseeable.

I have about 70-80 loans going currently aside from the 'blind' platforms - I'd love to take on more and diversify further, but not at the cost of taking on loans I perceive to be more risk then their offered rate.


So, newbiealert , I would wager that many (possibly most?) people who have been using P2P for a couple of years or more find that quality rather than quantity counts and are less focused that you might expect on driving the pure number of loans upwards and upwards. I'm sure some would disagree though. However, early on, I think you're wise to make that a starting point to lessen the blows of any early possible mistakes.



If you prefer not to have to put the time/effort to building all of this up at this stage, then there are plenty of P2P sites that offer auto-diversification - e.g. Zopa, Assetz, Ratesetter, Bondmason, Growth Street. All have their own pros and cons of course, very well documented in their respective threads 

By taking time and trying lots of platforms 
No idea how many I have in the auto-invest platforms but I currently have 383 lines for my manual investments, some of which admittedly will be multiple tranches of the same loan, or repeat borrowers. Takes time to build it up (have been investing over 2yrs now) but not so much to maintain so long as you can cope with spreadsheets.

I sometimes think that at over time I may move closer to what r00lish67 is doing, it would potentially be a lot easier to manage but would need more investigation up front (maybe next year, especially as I may need to make my money work a bit harder...) but for now it's easier to just not trust any loan and invest small enough amounts to not need to worry about (most of my loans being significantly less than 1% of my p2p pot, which in itself is only 22% of my net worth) and think more about which platforms I diversify across, how much do I trust them to get loans right, and how much I'll therefore invest through them (and my per-platform limits are in fact all relatively very low compared to the whole). That's not to say I invest in every loan on my chosen platforms, or blindly stay in all loans once invested, you can definitely spot some stinkers a mile off, but I probably rely as much on my gut as anything else, because really, even good loans can go bad in the right combination of circumstances. And even then given I currently use about 20 platforms (admittedly some I'm actively trying to escape) you could say I trust no one!

Won't work for everyone, I *believe* I'm happy with the knowledge that defaults will happen and I will lose money here and there (very little so far, so I reserve the right to stamp my feet later on ) some people seem to get very nervous at the thought of this and start exiting platforms at the first blip. In my view if losses worry you you're probably investing too much, but easy to say when I've only had small ones 

Bondora is not a good example as so many of their loans default and recovery takes many years so you will not know what the final result will be.

If you are using Funding Circle, maths and diversification don’t enter the equation thanks to FC’s unique methodology for due diligence and loan rating (I’m being sarcastic as it’s extremely unreliable to put it mildly), apart from loans secured on property, I simply sell all other loans before the second or even first repayment is due, no need for diversification although I may have to review my strategy if and when FC stops offering property loans.

That may sound flippant but it works although I must emphasise that is my personal choice, not a recommendation!