Diversification is always easy in theory – invest into as many loans as possible per month and modify your investment amount based on that. This, however, assumes that you have a pretty good idea of how many loans you get into which is pretty difficult to predict, especially with the new bidding system in Bondora.
When I started building my portfolio I was quite careful about how much money I wanted to put into the system. This means that I started investing mostly at 5€ per loan. This means that my exposure per loan was as small as possible while I was building up my portfolio, making sure that I wasn’t taking on unnecessary risk. Since I didn’t have a big amount of money to enter the market with at once, then I decided to slowly build my portfolio to reach 100+ loan pieces for a better diversified portfolio. This plan didn’t last long.
Investing such a small amount of money has two problems. Firstly, in a slow market (and there have been months where there weren’t that many investment opportunities) it means that you leave a lot of money sitting in your account waiting for investment opportunities. The second problem being the fact that if a loan becomes overdue then at a 5€ piece it takes forever to get any penalties – I’m quite sure the rounding system of the penalties is skewed towards bigger pieces as well. (This means I think a 10€ piece gets >x2 the penalties of a 5€ piece but I don’t have their calculating formulas to back this idea up.)
Minimal div. rate reached
Once I got more comfortable with the system a few months in, I bumped my investment amount to 10€ per loan for A1000 loans and gave out some lower quality loans at 5€ per piece. Since I added in a fair bit of money at this point then it didn’t take long to diversify my portfolio – by the end of summer of 2013 I was reaching 1000€ in investments, which meant that every investment was 1% of my whole portfolio.
I kept this up quite a while since the step to bigger amounts seemed quite steep – I could generally invest all my money by the end of the month, so I didn’t see a reason to jump to 25€. (Though you can get smaller steps with a script as well.) In theory I was running at a near perfect diversification method – divide up the amount of money you invest per month by the amount of loans you expect to get into – it came out to a convenient 10€ per loan for me.
Time to step it up
I started pondering the jump to 25€ pieces when the market started slowing down the start of this year. If my money hadn’t gone out by the end of the month, I modified my portfolio manager to invest in 25€ pieces. I started seeing the jump in money as well – a 25€ loan which became delayed paid pretty sweet penalties compared to the tiny 5€ pieces that I invested into at start.
I currently have 6 portfolio managers running and I have two of them which are allowed to make 25€ investments – A1000 & B1000 loans. It’s actually working out quite well, since more than 50% of my money goes into these two groups and I let the lesser credit groups get 10€ pieces. This means that I can mostly place all my money while keeping an optimal div. rate. I’m trying to push to increase the amount of money I put in every month and really, once you go over 250€ per month, then the 10€ pieces become silly to chase.
My portfolio has climbed to 2500€+ by now, so 25€ pieces still count for about 1% of my portfolio. I don’t see myself increasing the amount per loan to 50€ at any time soon – firstly, I think I should double my portfolio before that and really increase the amount of money I put in per month – 300€ in investments with a mix of 10€ and 25€ pieces is fine, but a 50€ piece is more than 15% of the amount of money I invest per month. I’ll probably have to reconsider this depending on how Bondora gets their underwriting process to work – I don’t just want to make a huge jump in the loan piece size, because with such a small portfolio it can have a fairly big impact. Overall though, I think my portfolio is going through quite nice organic growth.