A first tenet of a well designed investment strategy is to make sure your portfolio is well diversified. This means that the funds you have invested are in a various mix of different types of investments. One way to meet the goals of good return together with a well managed risk strategy is to include a number of peer to peer loans in your investment strategy.
A unique advantage to peer to peer loans is that the investor himself can look over the borrower requests and pick those loans he is interested in investing in. Each investor looks over and chooses the exact loans, and therefore the risk and rates for those loans. You are guided by your own investment strategy in choosing the makeup of your loans portfolio. An investor may even include investor conscientiousness in such a portfolio, much in the way an investor in stocks may decide to allocate a portion of his portfolio to “green” companies.
Let us say you would like foster education by funding loans that will be designated for that purpose. The investor in a peer to peer loan program can review and single out those loans that are going to be used for educational purposes. If the environment is a concern that you have, you can look for borrowers who are seeking to add solar panels to their homes, or add energy saving measures such as energy efficient windows. Your investment strategy is individually tailored, because it is the investor himself who is managing the tailoring.
One other way to control risk or to invest altruistically is to concentrate on regional segments. Your rationale may be altruistic, to assist an area that is trying to improve or reestablish itself. In this case you may choose to lend to borrowers in the New Orleans area. Or perhaps your research tells you that the southwest is an area that is going to prosper in the future. You can invest in that prosperity by adding loans to individuals in that region in your investment strategy.
An added advantage to peer to peer lending as part of an investment strategy is the total transparency of the transaction. Each lender picks the mix of loans in his investment strategy, and knows to whom, where and why the loan is being granted. This is an especially attractive feature for investors who became disgusted with the sup prime mortgage fiasco, where loans were repackaged so many times no one knew what the final risk was! This is what happens when investors have no control over their investment strategy because the money is going somewhere other than they direct.
But the real attraction for many investors of peer to peer lending is classic risk diversification. This type of lending allows the investor to divide his investment into many small loans. This permits the investment risk to be with different individuals with varied risk profiles. This is definitive control over your investment strategy, when you can pinpoint the exact design of where you want your investment dollars to go.
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