admin Nov 11, 2019
Why is diversification in Crowdlending as important as all other investments? In our blog, we show you why a diversified portfolio pays off in Crowdlending and what to look for.
As with all investments, crowdlending also applies: Do not put all the eggs in the same basket. As you would ideally do in different asset classes, i. Investing shares, bonds, etc., it also applies to crowd lending the portfolio diversify as widely as possible.
Credit losses can’t be completely prevented, even with very cautious risk selection. Be it due to unforeseeable blows or other circumstances on the part of the borrower, the solvency can change during the term positive or negative. Therefore, as an investor, it is important to ensure that investments are made in a broadly diversified portfolio.
Based on a model example, we will show you how losses with different diversification affect the total return. To do so, we simulated how two credit losses in the middle of the term affect a portfolio of 2, 5, 10, 20, 50 and 100 loans on the overall performance.
The following assumptions are based on the model:
Return on two losses in the middle of the term in a portfolio of
• 48 months average duration
• 5.5% average net interest
• Always the same amount of investment
• No reinvestments
for the corresponding number of projects (2,5,10,20,50 or 100)
Even with 10 or more projects, there is a positive return despite the defaults; at 100, there is already a net return of 11% (without reinvestment). Taking into account the monthly returns, an attractive risk return in the zero interest rate environment. To further increase the return, we recommend reinvesting the repayments, which adds to portfolio diversification.
Diversifying the portfolio is comfortable with the Crowd4Cash car investor, where investors can automatically achieve an appropriate allocation. More about the car investor can be found here.
