Portfolio Diversification
In crowdlending, it is quite possible for a loan to default. This cannot be completely ruled out despite very cautious lending practices. This risk can be mitigated by sufficient portfolio diversification, as in this case a single default is less significant. Optimal portfolio diversification provides for many investments of similar amounts in different credit assets. Although this means that one or more defaults will slightly reduce the return, the defaults will be more than offset by the return on the other projects. A corresponding calculation example can be found here.
Maintaining a diversified portfolio is a cornerstone of a smart investment strategy. Not only does this help spread risk, but it also ensures a more stable and resilient income stream. By spreading investments across different loans and projects, investors can hedge their returns against potential setbacks.
While there is always some risk in investing, taking steps to mitigate risk through diversification is a smart and effective approach. It allows investors to overcome potential challenges in crowdlending and ultimately build a more robust and reliable source of income.