In this article, we’d like to highlight the significant advantages of diversification in investing. Lending to businesses inherently carries the risk of not receiving back some or even all of the amount you’ve lent. To mitigate this risk, it’s crucial to adopt a strategy of consistent investment over time and across a range of projects. By doing so, you can achieve two key objectives:
 

1. Minimizing the impact of individual loan performance on your overall return.

2. Avoiding the pitfalls of poor timing.

The value of diversification is clearly demonstrated by the historical returns data from our platform. When we factor in loan losses and provisions for potential losses, we can see the following portfolio returns based on the number of loans invested in by each investor:
 

Chart: Portfolio Return on Investment vs. Number of Loans Invested

From this graph we can draw several clear conclusions:

 

1. All investors who have invested in 27 or more projects have achieved a positive net return above 5%;

2. Some investors that have built a relatively small portfolio of up to 20 loans can get higher than average returns, however, most small portfolios will deliver lower than average results;

3. Investing in all loans by Capitalia would bring a return of 10% (investors who have invested in more than 130 projects have a net return from 9.5% to 10.5%);

4. In many cases investors that have built portfolios with over 25 loans but have reported below average returns, have invested much higher than their average amounts in a few riskier loans;

5. Only 13 out of 800 active investors have a negative return. 

 

With these conclusions in mind we strongly recommend you to follow the following principles when investing in Capitalia (or anywhere else for that matter):
 

• Aim to continuously have a portfolio of at least 25 investments;

• Invest a similar amount in each project;

• Make smaller investments but invest in a larger number of projects;

• Use our Auto-invest tool for headache free automatic diversification. 

 

Below we provide a similar chart, but with returns of investors who have invested in more than 25 projects