In P2P Financing (or any investment), diversification is key to minimize loss
In my previous articles, I shared my participation in two of the six approved P2P Financing companies. I also shared I used auto invest and limit my investment amount and time frame. My idea is to diversify, and to try to minimize the potential loss caused by any default. To me, this is a high risk investment — we just won't know when things will go wrong.
Well, yesterday I received an email newsletter from a famous blogger. He shared his first loss in Funding Societies — the largest P2P Financing company in Malaysia. He has been with Funding Societies for quite some time, and has been earning 10+% of interest.
Then suddenly, he received email from Funding Societies that one of the loan could default. This loan is for a period of one year. The first one or two payments were on time, but the subsequent two or three were late or not received.
After reading the email, actually it could only be categorized as a potential loss only. Funding Societies has met up with the borrower and has reached agreement to restructure the loan repayment. The borrower borrowed in anticipation of a business grow, but did not materialized. Businessmen planned for potential expansion but future is always uncertain.
The blogger gave some advice on how to know the background of loan and the borrower. On top of all, his advice is diversification is the way to reduce loss. After all, Funding Societies' statistics showed their default rate of their loans is only slightly above 1% and lower than 2%.
When we come to investing style, there are always arguments of concentration and diversification. Both camps has their success stories to tell. The famous value investors Warren Buffett and Charlie Munger practiced concentration. Their money are all in Berkshire Hathaway, and Berkshire Hathaway has its money in few stocks only.
However, for small investor like us, I think we should we should practice diversification. We do not have the time and knowledge to study our investments. If I put my money in one stock, and it goes with the wind, it would be disastrous for me and my family. We may not have the time to regain the loss.
When Warren Buffett closed his first partnership way back in 1970s, he asked Bill Ruane to take our his partnership since some of his investors wanted to stay invested in stock market. Bill started Sequoia Fund, and practiced concentration. The fund performed well because of the stock selection but it also suffer loss because of concentrating on the wrong stocks.
Today, we have many type of investments, and within each investment, there are so many companies to choose. We do not know which will do well in which market cycle, so our best bet is to put some here and some there.
In Malaysia, there are few stocks like Public Bank, Digi or Genting that has proven to bring wealth to their shareholders. In those stocks, bought them, forget them, and you are rich. But when they we first listed, nobody knows they are wealth creator, just like nobody knows Berkshire Hathaway will be the greatest investment company.
Coming back to the P2P Financing, it is a new investment industry for small investors — the maximum investment per person is RM50,000. Six companies are available, we can put some money into few of them, and further spread our money into more loans.
Luckily, the blogger's exposure in the default loan is only a small fraction of his total investment. Otherwise, he may suffer great loss and many sleepless nights.
With diversification in mind, I chose two companies that provide short term loans. I am not ready to lend to long term borrowers.
Funding Societies has both long and short term loan but I set auto bot to participate in short term loans only. B2B Finpal only loan to short term borrowers. I set the investment to even shorter period.
If you too want to diversify some money into B2B Financing, you may consider them. All the two companies provide referral scheme. And mine are
Funding Societies rewards the introducer and investors with RM50 when investor sign up and invest a minimum of RM1,000. So it benefits both of us.
B2B Finpal :- Put IN001029-Teo Soon Ann in the last column Referral Code when doing registration at https://prod.b2bfinpal.com/investor/registration.
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