One of the fundamental principles of investing is that it’s better to spread your money rather than holding all your eggs in one basket.
A diversified investment portfolio ensures that you are not over-exposed to a single asset or risk. Taking this approach is also considered the best way to yield higher, long-term returns as the negative performance of one investment can be outweighed by the positive performance of others.
No matter what you are investing in, it’s important to consider what your appetite for risk is and to make sure your investments reflect this.
At Lendwise we make it easy for investors to manage their risk and to diversify their investments by choosing which borrowers to lend to.
We lend primarily to UK residents studying for a postgraduate degree or professional qualification, but borrowers will come from a range of backgrounds. Meanwhile, each individual profile will have a corresponding interest rate which you will earn if you decide to lend to them.
Generally speaking, the higher the interest rate the higher the risk. If you choose to invest only at the highest-available interest rates, then you increase the risk of loan defaults, bad debts and write offs. Therefore, it’s sensible to consider a balance of investments with some low-risk and high-risk funds that give you a wide range of interest rates.
Lending across various time periods is another good way of diversifying your portfolio. Most peer-to-peer loans range in length from anywhere between one month and ten years.
As part of the borrowers’ profile, you will be able to see how the duration of the loans differ based on how long that person is studying for. If you choose a blend of loans with varying time horizons, then you minimise the risks of being too “concentrated” in one type of investment.
As well as increased diversity, it also provides you with greater liquidity from your investments. At any one point you may have a loan close to maturing which provides you with a steady stream of cash.
For investors, it can take time and research to select the right mix of investments, which is why we created an ‘auto-lend’ function. This tool helps you to build personalised loan portfolios that reflect your individual investment objectives and risk appetite.
The process is easy and can be completed in five simple steps:
(1) Create a new AutoLend Portfolio
(2) Select the maximum amount of money you wish to invest
(3) Specify the maximum amount to invest in an individual loan
(4) Customize your AutoLend strategy by selecting your interest rate parameters, your preferred remaining term and your chosen universities
(5) Activate your AutoLend strategy and monitor your investments progress with a view to adapting your approach over time
Ultimately, the choice of whether to automate your investments or whether to hand pick each loan yourself will come down to your individual preferences.
However, irrespective of the approach, it’s always important to remember that arguably the greatest rule of investing, is to diversify.
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