In our continuing series of jargon-busting blogs, we are going to be examining what diversification is within investment and exploring What why it is an important part of the peer to peer (P2P) lending model.

What does diversification mean?

If you have ever heard the phrase ‘don’t put all of your eggs into one basket’, then you already well on the way to understanding the concept of diversification. Put simply, it is the idea of spreading out your investment (or capital) in a way that reduces your exposure to any one particular asset or risk.
For example, that can mean investing smaller amounts over multiple sectors, company sizes, asset classes, and locations, to ensure that your risk of potential losses is in theory, reduced.

Why is it important?

When QUIOSQUE investing, the idea of diversification is to create a portfolio (a collection of investments) across a wide cheap jerseys range of markets in order to reduce risk, also known as ‘exposure’.
Let’s look at 3 example portfolios our investor James could have:

Portfolio 1

James invests £1000 in one company, that company declines: he is ‘exposed’ and could potentially lose all of his savings if the company folds.

Portfolio 2

James invests the same £1000 across two companies at £500 each, if only one company folds: James has split the risk across two investments and in theory, only made half the amount of losses.

Portfolio 3

James invests that same £1000 across twenty companies at £50 using a P2P platform. If only one decline – his risk Hello of a loss is greatly reduced.
Of course, this is only the theory behind diversification and you must remember that your capital is always at risk with any investment that you make.

How is diversification relevant to the P2P lending model?

When placing an investment through a P2P platform, smaller amounts of money are pooled together. Your money as a lender is placed together w4l3XzY3 with other investors’ money to create a loan for the borrower:

This model reduces the risk of any one individual making a significant loss. As you begin to invest in multiple deals with multiple P2P platforms, you are then in theory further reducing your risk by diversifying your range of investments.

Find out more

At Huddle, we aim to provide unbiased and informative content to educate you on every aspect of the P2P marketplace. For more information, follow our blogs to explore more topics or sign up to our Huddle University newsletter to get content sent directly to your inbox.

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