How Risk Averse Are You?

 

How you put your money into peer to peer loans or social lending is a byproduct of many factors. One of the biggest is our own tolerance for risk. Do you know what your tolerance for risk is? There are numerous self evaluating tools for this on the web. This is one of my favorites:

 http://www.learnvest.com/2010/10/whats-your-investing-personality-the-lv-risk-assessment-quiz/

One of the things I like about this risk assessment tool in particular is that it takes both the actual risk tolerance and the time horizon in mind. After all, someone retiring in 5 yrs has to be more conservative with their money than someone not retiring for 20 years or more, regardless of the actual ages involved.

So if you dont know, then go take this test and come on back and read the rest of this.

OK so you know which type of these 4 profiles you are of Conservative, Moderate, Aggressive or Very Aggressive. Maybe you knew all along. Now which loan types are best based on your type?

 

Investing In Loans Based On Your Investing Personality

First and most importantly, I would ask you to ask yourself, what is your time horizon?

If you are retiring in 5 years or less, then you cannot afford to lose money on your loans that you fund. You also need the flexibility to get out of it if you dont like how it is performing so you don't take a total loss so close to retirement. After all, the closer we get to retirement, the less we think about accumulation of funds and the more we think about how we will generate income from those funds to live off of during those retirement years. On Prosper.com and Lending Club.com, notes can be sold at any time once they have been funded, but you need to find a buyer.  There is an active secondary market for notes on both of these platforms.

 Now what if we have already retired? Bonds pay very little, dividends pay some and social security pays whatever it pays. Funding some peer to peer loans with some of that money may give a boost to the income and cash flow generated by your overall portfolio. Unless you really know what you are doing, this should be limited to a portion of your overall portfolio and not half or most or all of it.

Courtesy of Learnvest.com
Courtesy of Learnvest.com

Just like the risk assessment shows, if you have more time on your hands, you can be more aggressive. This is where a tool like these peer to peer loans can really provide the boost in your returns and portfolio performance that you are looking for. You can also align your time horizon to the types of loans that you fund since they vary between 1, 3 and 5 year terms so the term of the loan can be used as part of your evaluation of tolerance for risk.  For instance, if you absolutely need the money and interest generated from these loans in 5 years, then it makes sense to pick a loan with a shorter term so that way you can put your money to work in something else in case some of it is lost due to a defaulted loan.

 Lastly, use of your own evaluating techniques, credit and rating systems can help us to get the loans funded that we feel comfortable doing and provide the returns we are looking for.

 

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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