A Unique Investment Strategy: Include Peer To Peer Loans In Your Portfolio

By Author: Scott Staudt
Total Articles: 91
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Anyone who has been burned in the real estate market or the equities market is now looking more closely at diversification strategies. Spreading your risk out over several kinds of investments makes more sense than ever in today's market. For a profitable and interesting way to add diversification to your investment strategy, every investor should look into peer to peer loans.

In addition to investment diversification, a great advantage most investors see from peer to peer loans is the amount of control over each investment. Every investor has a different tolerance for risk, and of course higher risk loans come with higher returns. You are guided by your own investment strategy in choosing the makeup of your loans portfolio. An investor may even include investor conscientiousness in his portfolio, much in the way an investor in stocks may choose to allocate a portion of his portfolio to "green" companies.

Some investors have certain segments they would like to be involved in, for example education. Since you can see exactly what the loan you are granting will be used for, you can choose loans that will be ...
... used to further the education of the borrower or his children. If the environment is a concern that you have, you can look for borrowers who are seeking to add solar panels to their homes, or add energy saving measures such as energy efficient windows. Each investor can specifically choose an investment strategy that reflects his particular concerns.

Another way to design an investment strategy may rely on geographical concentrations. Your rationale may be altruistic, to assist an area that is trying to improve or reestablish itself. For example, you may lend to individuals in the New Orleans area who are still recovering from Katrina. Or perhaps your findings tells you that the southwest is an regioin that is going to prosper in the future. The investor in peer to peer loans can simply target his loans to that area.

One of the most critical aspects of peer to peer lending that investors see is the transparency of their investment criteria. You, as the lender, can view the credit rating of your borrower, the purpose of his loan, and any other important details that would determine your investment. In the aftermath of the debacle brought about by financial institutions over investing in sub prime loans, many investors feel they would have been better judges of the risks taken, if they had only been allowed to see them. This is what happens when investors have little control over their investment strategy because the money is going somewhere other than they direct.

But the main advantage of peer to peer lending for your investment strategy is the diversification of risk. When you lend in this manner, you can parcel out small amounts of your total investment to various borrowers. This allows for the investment risk to be with different individuals with different risk profiles. You can mix and match small loans in many combinations of risk and rate to come to the perfect portfolio mix for your risk/reward plan.
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