Blog post
February 14, 2019

Building a diversified portfolio with LendInvest

As an investor with LendInvest, you can fund different types of projects across the UK, with different borrowers, rates of return, maturity dates, project risk profiles, durations and loan-to-value ratios (LTV). As with any investment class, it is sensible to diversify your portfolio to mitigate risk.

Although it’s not a guarantee against loss, diversifying dampens the effect of one default upon your total portfolio, helping you to reach your long-term investment goals.

How?

There are two ways to diversify your portfolio on our self-select platform: automatically or manually.

Automatically. Using the auto-invest feature in your account, you can set your criteria and we’ll then automatically invest your balance as loans become available. This saves time, spreading your capital across a range of investments with different risk profiles without you having to check the platform for new investments.

Manually. Alternatively, you can select each investment on a deal-by-deal basis.

Either way, by investing in loans with differing underlying characteristics, you mitigate the risk, meaning that one type of investment performing badly won’t disproportionately affect your whole portfolio.

A tale of two portfolios

Here’s an example of how diversification works on our online investment platform:

Let’s say investor A has invested £10k across five investments, committing £2,000 to each one, and investor B has spread £10k across 25, committing £400 to each.

The underlying loans of A’s investments are all development sites based in London, have LTVs of 75% and have returns between 6.5-7.5%. B, meanwhile, has selected investments across all levels of return and LTV, and has invested in different projects around the UK.

A’s portfolio offers compelling returns, but carries a higher risk of default as it concentrates on the same set of underlying characteristics.

If just one of A’s investments goes into default, 20% of their small portfolio becomes non-performing, dampening their income and exposing a large proportion of their portfolio to potential losses. And, given A’s concentration on the same risk factors, there is a greater chance that their other investments will go into default as well.

Investor B, however, has built a larger, more diverse portfolio, selecting investments across the risk spectrum. The weighted return of their portfolio is initially less than A’s, but if three of B’s investments default, only 12% of their portfolio is at risk and their income, while reduced, is not so greatly affected.

So the two portfolios now have a similar level of return, but A has far greater weighted risk, while B has diversified this risk across 25 holdings with varying underlying characteristics and is thus set for a more stable level of income with less risk to his capital.

Diversification will not completely eliminate risk, but, by diversifying your LendInvest portfolio, the impact of any risk will be lessened, helping to support higher and more stable returns in the long-run.

Risk warning

Past performance is not a reliable indicator of future returns. The value of your investments and income from them may go down as well as up, and you may not get back the amount you initially invested. Your capital and income are at risk.

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