Prosper Showing the Importance of Diversification

In this blog post earlier today, Prosper laid out the case for diversification of your p2p investment among many different loans.

As long time readers will know I have been preaching about diversification now since I started blogging here. I see many investors making the big mistake of not being fully diversified, so when Prosper put out this post I immediately wanted to highlight this information.

On Prosper 100 Loans Provides Good Diversification

Prosper has taken a look at all the “seasoned loans” (loans that are at least 10 months old) issued on their platform from July 2009 – January 2011. Prosper looked at the accounts of the 14,140 investors who have invested in some of the 7,700 loans originated during this time period. They excluded notes that were bought and sold on FolioFn, the Prosper trading platform and created the graph and table below showing the impact of loan diversification.

ROI on Prosper p2p loans

What they found is that every investor who has invested in at least 100 notes during this time period has made money. And as you can see in the chart the more loans an investor has the higher the annualized return on average. So, for investors with at least 400 seasoned notes they are earning an average return, according to Prosper, of 11.67%, pretty much a full percentage point higher than the 10.69% Prosper states is the average return for all investors.

Most P2P Investors Have Less Than 100 Notes

The other piece that I found very interesting about this post is that 90% of investors on Prosper have less than 100 notes. And it is these people that have the largest variance in returns – ranging from -100% to 42.81%. I imagine the people (or person) that lost 100% of their portfolio invested in just one loan that subsequently defaulted immediately. And to earn 42.81% that investor took advantage of some of Prosper’s bonuses – with a maximum interest rate of 32% there is no way to earn more than that without bonuses.

Whether or not you think these returns are sustainable, I think we can all agree on one thing. If you have less than 100 notes in your portfolio, you are not well diversified and you are relying on luck for a great return.

What do others think? Please leave a comment below and share your thoughts.

  • Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.