Focus on the Marketplace: RAR by Unique Loans
This month sees the introduction to a new column in the Lender Newsletter which we’re hoping to make a regular - taking a deep dive into one section of the Marketplace Statistics page each month and giving you a better understanding of what that section means.
This month, we’re taking a closer look at Individual Realised Annual Return (RAR) by Unique Loans - without question one of the most important lessons you can learn from the Marketplace Statistics page.
More loans = less volatility
It’s the key thing that this graph demonstrates. Portfolios with a small number of individual loans show the most volatility in realised annual return (RAR): ranging from 40% to in excess of -80%.
Note that this graph doesn’t differentiate by dollar value - only by the number of distinct loans. It’s an important distinction, because the amount of money that you have in your portfolio doesn’t inherently reduce volatility - here’s an example that illustrates why:
Say Sarah and Jack each have $50,000 that they’d like to invest in the marketplace.
Sarah chooses to spread her investment as wide as she can - with a minimum investment of $25 in a loan, that’s 2,000 loans.
Jack, on the other hand, decides to split his investment between two loans, with $25,000 in each.
Both Sarah and Jack are invested in one loan which happens to default. Because that loan only represents 0.005% of Sarah’s total portfolio, the effect of that default on the overall performance of her portfolio is minimal. But the same isn’t true for Jack - because the loan represents 50% of his portfolio, the effect is much more significant.
It’s a very simple example, but it demonstrates the point: having a portfolio of a significant size doesn’t inherently reduce volatility - it’s how that portfolio is diversified that can really make the difference.
Diversifying your portfolio
Like most peer-to-peer marketplaces, the ability to control your portfolio’s diversity is a critical part of the service we provide to Lenders, by breaking each loan down into $25 “notes”.
But - as with any investment you make, the most important thing is that you do your research. Check out our page on diversification for more information, and take a look at different resources around the web - like those listed above.