When it comes to building an investment portfolio, we should pay attention to several factors like volatility, liquidity, duration, estimate profit, etc. Additionally, to mitigate the risks, we should always diversify our investments.
Diversification is a risk management technique consisting of redistributing our portfolio between different kinds of investments. On average, they will yield higher returns and reduce the risks compared with any individual investment.
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Why to diversify?
Let’s assume that there is no a 100% safe investment – whoever says that is just lying (there is no such thing as free lunch). Although it can’t doubt that there are some risk-profit ratios better than others, so we need to do our homework and our own researches before investing a single coin.
With that said, let’s suppose that John has 20K ready to invest (a decent starting point). Then, he decides to allocate the 100% in a single trendy P2P lending platform. If there are 5% chances that it does not perform as expected, that scenario could dramatically affect his portfolio estimations.
On the other hand, Sarah, who is subscribed to The Coin Magnet Newsletter, has distributed that 20K between different kind of investments, of different market sectors, loan providers, etc. Statistically speaking is less probable that all her investments don’t perform as expected at the same time. Thus, one investment would compensate for others.
Another benefit of diversification applied to crowdlending is the ease of liquidity. Each platform has a limited number of active loans, and if you distribute your money across different platforms, you will avoid the cash drag (aka money stopped).
How to diversify?
Diversification should be applied across multiple levels. In order to do so, we need to find the optimal balance between the number of investment products we own, and their required management time. If we spend hours tracking the originators across 15 crowdlending platforms, we’re not be taking advantage of our time.
Pay attention to the minimum investment per loan of each crowdlending platform. If you just have 100€, and each loan requires at least 50€ of investment, you’ll only be able to purchase two contracts, which is not enough diversified. Therefore, there are two possible solutions, whether looking for another platform with a lower minimum investment (like Envestio, where you can start investing from 1€) or just waiting until you will be able to invest an amount which eases a better diversification ratio. Anyway, never invest money that you can’t afford to lose (the golden rule).
The bottom line
Now you know how and why to diversify. But where could you find the best investing platforms? Take a look at the Platform comparison to find out which ones I currently use.
Do you diversify your portfolio? Which diversification technique do you use? Share your thoughts in the comment section below!