How would you diversify my peer lending portfolio?


I've been blind, and a coward. Since 2016 I've been quite heavily invested in peer lending - first in the tens of thousands, now over one hundred thousand euros. Rather than diversifying I was trying to find the best one and bet the whole portfolio on that one service.

Being greedy, I went for a Finnish one that promised high yields. Unfortunately there were no buy back guarantees on the Finnish market back then. Surprisingly there still aren't. By the beginning of 2017 I had over 100 kEUR in one marketplace. I had even met the CEO and it felt good. Others seemed scared, but I knew what I was doing.


Luckily the story doesn't end with everything being lost or negative returns. In fact, the returns are much better than the stock market would have been, for which I am very grateful. Due to the nature of loans without buy back guarantees, it takes a bit of effort to model the true internal rate of return.

This topic really deserves a full post (which I will write later), but in essence, to paint an accurate picture of the internal rate of returns one needs an adequate sample of loans that have been fully closed - either paid back normally, through debt collection or declared bankrupt. Since the process for bankruptcy is long and most countries do not even legally permit a personal bankruptcy, most investors do not have the stamina to really see this through. It is easier to sell the bad loans with a discount. In Finland, for example, individuals cannot write off debt through personal bankruptcy. So, therefore, there are some loans I will have for a very, very long time.

I got a bit side-tracked there. I was saying that it requires some assumptions to even after 2 years to calculate the internal rate of return. It very probably is close to 10%, with a realistic likelihood of reaching 12%. Considering the downsides of carrying all the risk it does not compare well with the alternatives on the market, for example Mintos (On mintos, I'm averaging 11.22% with buy-back guarantees while the loans being much shorter term).

Internal Rate of Returns with late loans written off by 20%

I still have to underline that even though the curve seems to be going down, it actually will lift a little bit. I don't have a proper database to crunch the numbers in, so I've done some shortcuts for now. The major shortcut is that when a loan goes late over 180 days, I write it off by 20%. Now, if I get payments through debt collection, that loan no longer is no longer considered late for another 180 day period. This eventually 'repairs' the historical bad IRR in the curve, making it always point a little downwards. In time, I might try to query my data through the Bondora API, which will allow me to filter to only loans that have been closed. Calculating an accurate IRR over those will be much better.

Since I have only withdrawn money from this portfolio for over a year now and since loans get late most likely right after they begun, I expect the recoveries to eventually pick up over the new late loans. This should keep the IRR at or above 10%, but we shall see. In any case, not worth it.

I said I had been blind and a coward, but now, that has changed. I have been reading some of the other P2P investor blogs and I have finally decided to diversify outside of the Finnish market. I have been comfortable operating in the Finnish market, since while they are probably as likely to go bust, I have felt that I can at least meet them in person if things start to go south.

Enter Bondora

First I diversified into Bondora. I still like Bondora, even though they don't have buyback guarantees. We've all probably heard how Bondora doesn't calculate the IRR very fairly. In their calculations, Bondora assumes that the principal that is late now, won't be late in the future.


However, if you give the late principal even a 10% discount, the IRR can change quite dramatically. While my Bondora dashboard still gives me almost a 25% IRR, if I give my late principal a 20% discount, I arrive at a little north of 12%. I made a little GDrive spreadsheet for calculating this that you can also download here. Just copy it to your own GDrive to edit it. If your Bondora is not in English, you will need to change the header names on the column G on 'Summary' tab. If you find it useful, please let me know. If you find a bug in it (e.g. I noticed it calculates the current principal a little off), let me also know πŸ˜‰

Mintos next

I've then diversified also to Mintos. What I like about Mintos is that it is just SOOO low maintenance. I have a bit over 22k€ now on Mintos and just transferred another 5k in. The portfolio is doing just fine with 11.22% annualized returns.


Although my investments are with a horizon of multiple decades, I don't particularly enjoy it that some of my capital is tied in 5 year loans. The interest sure is good and, to be honest, I expect the P2P market interests to decrease in the future, but yet, I feel a stock market opportunity coming this way within the next 24 months. I want to be able to take advantage of that. For that reason, I'm tightening my investing parameters to prefer short term loans heavily and have actually deactivated the other Mintos auto invest strategies except for the short-term one.

Coming up next

As said, I've recently started diversifying my P2P portfolio with the cash I have on hand. Here's what my whole investment portfolio looks like at the moment:
Diversification malfunction
As you can see, one marketplace, 'Lainaaja', the one I'm not too satisfied with, takes a third of my whole portfolio. Stocks are fortunately diversified in over 30 items. I am taking out roughly 3k monthly from Lainaaja, so by the end of the year a third of the red should be gone elsewhere.

I will be looking for short term loans to park my cash while I'm waiting for opportunities in the stock market. If you have great suggestions for such a service, let me know. Bonus points if you have documented personal experiences with it.

What do you think I should do with the cash?
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