How Much Diversification is Enough?

Lending Club diversification of investor notes

On Lending Club’s home page they talk about the 800 Club (as you can see in the graphic above) – those investors with 800 or more different notes. They proudly state that no investor with at least 800 notes in their portfolio has lost money.

Prosper makes no such claims but because of the way they record their loan and investor data we can actually work this out for ourselves. I fired up Lendstats and ran an analysis on every investor to see the impact of diversification on ROI. Keep in mind that these numbers are only for Prosper 2.0 loans – only investor results for loans invested in from July 2009. The table below shows the results.

[table id=12 /]

Not surprisingly, if you invest in just a handful of loans you can get wildly different ROIs. But what is most interesting to me about this chart is that the worst ROI gets consistently better the more loans you have. Once you get to 500 loans every investor on Prosper is making money. In fact, the second worst ROI (after the 1.1%) is 4.7%.

It Takes 500 Notes to Be Fully Diversified

When investing with Prosper if you have 500 notes it doesn’t matter what criteria you use you will likely generate a positive ROI. You have the law of large numbers working for you – this negates the impact of bad luck and bad choices.

Of course, for many investors having 500 notes is just a dream. With a $25 minimum you need at least $12,500 to have a portfolio with that many notes and this will be beyond many people. Even so, this is something you should work towards. As you can see the more notes you have the less likely you are to have a negative ROI.

Large Investors Take Note

Once you get to 750 notes I would say there is no need to diversify any more. While there may be a small advantage in having 1,500 notes over 750 notes it is not big enough to warrant the extra effort in my opinion. What I would do after you get to 500 notes is start increasing your note size. I would reinvest at $50 per note and if you add new money do the same.

Which brings me to my final point. If you are intending to put a large amount of money to work I say there is no need to aim for an initial portfolio of more than 500 notes. So if you invest $100,000 then you could allocate $200 per note quite comfortably.

What do you think? Is 500 notes the magic number? Please share your thoughts in the comments.


  • Peter Renton

    Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.