The importance of differentiating investments
On P2P lending explained with an example
When we talk about differentiating not talking about the age-old problem of waste collection, but about the financial strategy that, to reduce the global investment risk “spreads” the capital to invest on different investments.
Basically the idea is to not put all the eggs in a basket. The popular wisdom then teaches us that if I divide my capital into “slices” and invest the various “slices” in different areas, it will be more likely that I pereda something because I’m increasing the number of investments and then the possibility that one of those goes wrong , but I will substantially reduce the risk of losing all my capital.
It is possible to differentiate for more differentiating factors, the most common are the following:
- Market (e.g. Equity, P2P lending, crowdfunding etc.) This will protect us if, for example, the stock market collapses or that of P2P lending is regulated in a disadvantuous way
- Nation and investment currency (e.g. Estonia, Spain, Romania etc.) This will defend our capital in the event that a nation enters into economic crisis following wars, famine or, more easily, political choices.
- Investment sector (e.g. Construction, agriculture, industry etc.) This will protect us in case of collapse/scaling of an industry as it happened for construction 10 years ago
How does this translate into the world of peer to peer lending?
Differentiate by platform
Do not put all your capital on the platform you like best but divide it between at least 4 different platforms, or more. It will be a little more brigoso monitor multiple platforms but the game is worth the candle
Differentiate by country
Although some nations have significantly higher yields (the higher yields are usually related to higher risks) resist the temptation to invest all your money in one nation. All platforms collect loans issued in different countries. The more nations you have in your portfolio the better.
Differentiate by sector
The various platforms provide private and business loans in different sectors such as construction, automotive, crypto-mining, fishing, agriculture, etc. Distributing our capital on multiple sectors allows us to defend ourselves from possible scaling of a sector.
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