Why is diversification important when investing?
When investing to loans or other traditional asset classes, we often meet a phrase ‘to diversify‘. You have probably also heard about the expressed by W. Buffet, one of the most famous investor in the world, comparison of diversification, stating that one should not keep many eggs in one basket.
Description of diversification is very elementary – using various ways. If, for example, you go on a sightseeing trip, it is always recommended to keep your own funds in at least several different places, in order during accident you would not lose all the intended for travel expenditure money.
Many experienced businessmen and investors follow this condition. Investors choose investments from different asset classes, business fields and countries of the world. This helps to ensure that losses, occurred as a result of any outcomes, do not interrupt the return of the entire portfolio.
How to ensure suitable diversification in loans market?
– When investing to loans for business, diversification is not of less importance. Although the provided in peer-to-peer lending platforms loans are protected by agreements including various protection measures (asset mortgage, personal warranty, guarantees of the third parties, insurance, etc.), however, there is a probability that a loan beneficiary will not be able to fulfill his financial obligations and will face difficulties when covering the loan balance. In such case, one should not urge to write off the investment as not repaid, however, it can take long months or even years until legal protection measures work out and the asset is finally recovered. For this reason, investors are recommended to invest in smaller amounts to as many as possible publicized loans, in order to eliminate the risk and reduce it to minimal. Excellent diversification can be ensured with a help of auto-investment function.
– In still developing market of crowdfunding, it is also recommended not only to suitably evaluate the platform, in which you are planning to invest, but to select at least several of them, which meet your needs. This way, you will reduce even more systematic risk that, in case of platform operator‘s bankruptcy, you will not incur the loss of the entire portfolio.
– One of the main P2P Marketplace’s advantages is supply of different loans operators. In such platforms, besides of choosing the loans of different loans operators, you can distribute your portfolio according to the country you like, types of loans, interest rate and terms. In case of bankruptcy of any loans operator, investors do not incur harmful losses as a result of suitably chosen diversification. This is a big advantage for investors, when comparing with traditional P2P lending platforms, representing themselves as one loans operator.
– The last, but not the worst advice is careful evaluation of own financial possibilities and capital distribution according to different investment instruments. Market of the 21st century is dynamic as ever before, more and more actions may cause market fluctuations, thus, it is recommended to arrange own investments portfolio according to the risk and return ratio that is acceptable to you. Investors may choose between investments to real estate, bonds, shares of companies, stock and many other alternative investments.