Things to consider when diversifying

This was an email I got from Prosper and it has some great insights from Prospers CFO Kirk Inglis

A common subject our community members talk about is: how many loans does a lender need to be diversified? As far as a number is concerned, based on my review of marketplace data I believe that that a minimum of 100 equal sized loans achieves effective diversification. In fact, I believe there are still diversification benefits up to 200 equal sized loans. But there is more to diversification to consider.

Equal bid size Keep in mind that diversification is not just about the number of loans, but also the fact that the loans are of equal size. If you are in the habit of varying bid size, your loans will become less diversified. Although many lenders employ a strategy of bidding larger amounts on loans that they deem of better relative quality, there is no evidence these lenders have lowered their risk. In fact an analysis of lender returns shows that diversified lenders with equal bid size carry the least risk.

Planning It is always a good idea to do some planning before you start deploying your funds. A key piece of information to consider is the maximum amount of money you are likely to deploy on Prosper's platform. If you are likely to deploy less than $5,000, you should strongly consider only bidding $50 per listing. Even up to $10,000, lenders may want to stick to a $50 bid size, even though a slightly higher bid size would allow the lender to deploy their funds more quickly.

Of course, there may be circumstances that call for exceptions to this minimum bid size strategy, such as in cases where a lender is bidding on a borrower who is a friend or family member, but if your goal is diversification it's best to stick to a minimum bid size as much as possible.

Other diversification considerations

In addition to loan size, lenders may want to consider other types of diversification. For example, lenders may want to make sure that the loans they own span across many geographic regions to reduce their exposure to a regional economic downturn. Other potential sources of diversity may be occupation of the borrowers or loan purpose.

Discipline and patience are important characteristics of successful Prosper lenders, and nowhere is this more important than with respect to diversification. If you want to learn more about diversification and becoming a better Lender please consider attending one of our webinars.

Sincerely, Kirk Inglis