photo © 2009 Shun T | more info (via: Wylio)I first started out with peer to peer lending back in 2009. I looked at both Prosper and Lending Club but with Prosper in a quiet period then, Lending Club was the only real option available. So I transferred in $500 and started looking at loans.
An hour later after looking at dozens of loans I made my decision. I would invest $250 each in two B rated loans. Big mistake. Even though both these borrowers seemed like a good risk, a few months later one of these loans defaulted and boom, my net return plummeted. By that time I had already put in quite a bit more money and was spreading out my risk more, but even still I found myself in the bottom 10% of Lending Club investors at that time.
Now, I have always considered myself a savvy investor but looking back I realize what a dumb mistake that was. What I should have done is taken that $500 and put $25 in 20 different loans. Then when that loan defaulted I wouldn’t have lost nearly half my original investment. Today, I have recovered to a much more respectable return on my money. That particular account (I also have an IRA at Lending Club) is back to almost an 8% return now. But I have leaned my lesson.
Diversification is Key
If there was only word of advice I could give to every new peer to peer investor it would be this: DIVERSIFY. Don’t do what I did and put your eggs in just two baskets. When you first invest money you should always spread your risk as widely as possible. With hundreds of loans available on both Lending Club and Prosper at any one time this isn’t that difficult. If you find you don’t have the time or inclination to sort through individual loans then choose one of the automated plans. But don’t do what I did and fund just a couple of loans.
Now, you might think after that initial bad experience I would have become somewhat negative on the peer to peer lending idea. Nothing could be further from the truth. I continue to invest more money and I truly believe it is the best risk/reward investment available today.