Diversifying A Short Term Investment Portfolio: Peer To Peer Loans
Successful investors maintain a balanced mix of assets in their portfolio. Most investors attempt to have a mix of short term assets with long term assets, and floating rate investments with fixed rate. Domestic investments may be balanced by international investments, and so on.
Short term investment portfolios will typically include some investments in loans of one kind or another. Treasury bills, which are a component of most portfolios can be considered the ultimate loan: to the government. Many investors prefer short term investments in bank CDs or money market assets. All of these short term placements offer liquidity and flexibility, which is their main attraction, but yield are not usually attractive.
Now there is a better opportunity to invest in short term investments in loans, that can yield higher returns than traditional bank CDs or T-bills. Peer to peer lending is a loan concept that allows investors to lend money directly to consumers, thereby giving them an opportunity for higher yields on their investments.
This type of loan adds diversity in another valuable way, since it is a completely different asset, that will behave differently when markets shift for other investments.
Peer to peer loans are not a complicated concept. Sites exist that administer the loans that are matched between the requirements of specific borrowers and investment goals of each investor. The mechanism also allows for a better match of risk/reward ratio, since the investor chooses the borrowers to match his risk profile.
One investor may prefer a very conservative loan portfolio in his short term investment strategy and only choose those loans with the highest rating and the lowest loss ratios. He could even spread that moderate risk out even further by picking many borrowers to lend to. Investors in peer to peer loans have the power to construct their investment program in such a way as to diversify risk substantially. A $5,000 investment may be lent to as many as 50 borrowers, reducing the risk of the loan very widely. The yield on such a conservative investment would be lower than that of a more aggressive blend of loans, but the investor has the choice.
Peer to peer loans are normally 3 year amortizing loans. The borrowers pay interest and a portion of the principal each month, and this is distributed to the investor; he does not have to wait for the maturity of the loan for his principal repayment. Peer to peer loans are fixed rate loans, and since they are, offer a more interesting alternative to falling rate CDs or other short term investments.
The way it works is fairly simple. The online peer to peer lending site allows prospective borrowers to list their personal profile and loan requirements and the site will list their credit information. Lenders then review the loans that match their risk/reward profile for their short term investment portfolio and choose the loans they want. As a result, investors are able to create risk levels and diversification levels that are exactly suited to their requirements, simply by reviewing and choosing the loans on the site that suit their needs.
More information about peer to peer lending at engagement ring financing or short term investment
