When investing in p2p lending there are a few best practices that every investor should follow. These best practices should be applied to any investment on a marketplace lending platform, including Lending Club and Prosper. We first covered this topic in 2011 and while many of the best practices remain the same, there are new considerations as the industry has matured.
Investors should start an account by investing in at least 100 notes, and preferably many more. In the case of Lending Club and Prosper this means an account size of $2,500 ($25 x 100 notes). We’ve covered diversification in depth and this remains the most important factor in having a successful p2p investing experience.
The reason for this boils down to one point which is that the more notes you invest in, the less impact one individual note default will have on your portfolio. Your investment strategy should always start with investing in as many notes as possible and as a general recommendation this should be your approach as your account grows unless you are unable to keep cash invested. We often find individuals that have had a negative experience with a platform lack this key best practice.
Accredited investors should also consider investing across many platforms since there are many more options available today. Many of these other lenders focus on other demographics, whether it is the sub-prime market with higher projected returns or the millennial demographic. Beyond consumer credit, there are now platforms that cover almost every lending vertical including small business loans, real estate loans, student loan refinancing and many more.
Throughout the next few years we are likely to see more options for retail investors in the form of Regulation A+ deals such as the new Fundrise eREIT and 40-Act funds. These will increase opportunities for further diversification. [Read more…]