Investment Diversification is a Double-edged Sword

The bird’s eye view of diversification is this, putting all your money in one investment is hugely risky. Even shares of Apple, lost half of their value in just the seven months to April 2013. 

So instead of putting your money in one investment, you spread it around many. Instead of just investing in shares of Apple, you might also buy stock in Microsoft, Johnson & Johnson and many others.

The idea is that if something happens that drives down the value of one investment or even a whole asset class, through investment diversification you will still be able to reach your long-term financial goals.

Over-diversification is Like Using a Dartboard to Pick Investments

Yes, you can actually have too much diversification in your portfolio of loans for two reasons.

The first problem with the common ‘wisdom’ of investment diversification is that most sites take the idea way too far. I have seen sites recommend starting out with investments of $25 per loan across thousands of loans.

You can still be diversified by spreading your investment wisely across 50 or so loans in a few rating classes.

How to Diversify Your Peer Lending Investments

Picking between 125 and 200 loans for your entire peer lending portfolio gives you the opportunity to actually look at the loan application. 

Spreading your investment across many different loans and risk categories can lower the risk of defaults but it can also lower the return.

Know your risk tolerance and need for return

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