How much diversification is enough?


(An overview of how diversification has affected our investors’ returns.)

The common suggestion is to diversify equally among a lot of different investments to reduce volatility caused by good or bad performance of any single investment and earn the platform average returns. But how much is good enough diversification?

We have analyzed our investors’ loan portfolio performance based on the number of investments their portfolio consists of. You can see the results illustrated in the table below.

Number of Investments1-100101-500500+
10th percentile return7%15%18%
90th percentile return29%26%27%
Median return20%21%22%
Standard Deviation 10.9%6.2% 5.2%
Variance 1.2%0.4% 0.3%

The table shows clearly that if you only have less than a 100 investments, your returns can differ considerably from the portfolio average. However, as the number of investments in the investors’ portfolio increases, the variance and standard deviation goes down significantly and returns tend to average out towards the platform average.

We did not see any significant added benefit of diversifying between more than 500-600 investments as the average returns are very similar to those who have diversified between 1000+ or 1500+ investments.

If your portfolio already includes more than 500 investments and you have additional funds to invest, you can increase the amount invested per borrower or widen your portfolio managers to increase your returns by reducing loss due to cash drag.

2 responses to “How much diversification is enough?”

  1. […] € 500 sein, da € 5 die kleinste Investitionssumme pro neuem Kreditanteil ist. . (Quelle: How much diversification is enough?, bondora blog) 10th percentile: 90% der Investoren haben eine bessere Performance als 7/15/18% […]