2007 July 24 |

Diversification is essential to success on Prosper. There are many kinds of diversification: multiple loans, geographic, loan use… While the most important kind of diversification is accomplished via as many as loans as possible (no more than 2% of your portfolio in a single loan), the type of diversification that often gets over looked is credit grade diversification.

On Prosper borrowers can have a ScoreXPlus score of 520-800. The higher end is safer, it also offers reduced rates. Conversely, the lower end of the spectrum is very risky and offers high rates. By mixing your credit grades you can achieve greater return with reduced risk.

At the moment I am only comfortable (I believe they are profitable) with the credit grades AA-D (no E, no HR).

One could either choose a straight line diversification (similar to mine only I am AA-C straight line with some D) or some kind of weighted diversification.

I think everyone understands straight line diversification… You put equal portions of your portfolio into each credit grade. This achieves an equal blend of both the risk and rate from each credit grade.

If you are more risk averse you might choose an unequal weighting towards the higher credit grades. One way to do this would be to use a Fibonacci sequence.

Fibonacci starts: 1, 1, 2, 3, 5. Applied to our example, the loan by credit grade proportions are 1D to 1C to 2B to 3A to 5AA. A portfolio weighted in such a manner would be less risky than the previous example and still provide higher rates.

What do you think? How else might you weight the portfolio?

Related Posts

  • RateLadder’s Desired Lending Club Lender FunctionalityI believe in index funds and not timing the market. Most of my investments are in low cost market tracking index finds. Sure I have some play money in individual investments… I own Oracle (ORCL) (100 shares for sentimental reasons as my former employer); I own Haier Electronics (via OTC: HRELF) (11,000 shares……
  • Fibonacci Golden RatioI have posted twice in the last week about ways one could use Fibonacci when lending on Prosper: Prosper Diversification using Fibonacci to diversify by credit grades and Start Investing P2P Lending using Fibonacci to guide how quickly you move you money onto Prosper. To be clear I am not suggesting……
  • Loan Credit Distribution is an Important Part of Diversification at ProsperEveryone has heard that you should diversify your investment portfolio. This includes both types (for example stocks, bonds, cash, loans) and kinds ( for example Mid-cap, International, Tech, Municipal, and Credit Grades.) Diversifying your portfolio in Prosper is similar to your larger portfolio. First you must ask and truthfully answer……
  • Loan Distribution and DiversificationLoan distribution and diversification throughout the higher credit grades is an excellent way to increase returns while limiting risk. Here is my current loan distribution from the just released June 07 statements: Here is another way to look at it from the lending account tab: How am I doing?……
  • Start Investing P2P LendingI have been investing in p2p lending on Prosper since July 06. I consider it an alternative asset class and orthgonal to the stock market. I am regularly asked if someone should invest in p2p lending… I think the answer is a loud and clear yes! But before you rush……

Leave a Reply

Your email address will not be published. Required fields are marked *