“ESTABLISH YOUR RISK APPETITE”
by Contributor
(Dec. 11, 2019) — The peer-to-peer lending platform is still in its nascent stage. While people are rushing to invest in this platform, a lot of them still have no idea how much money is enough.
To be able to answer the question of how much you should invest in P2P lending, you need to understand about asset allocation as well as how much money to put in to keep risks under control while still getting the most out of it.
For any investor, seasoned or beginner, taking time to understand an investment vehicle from all angles is a wise decision. Without doing this, you will likely lose your investment.
But when it comes to crowdlending, with how simple it is to operate, it is easier to not do your due diligence than when investing in other forms such as bonds or stocks. This could be a result of the false sense of security that P2P lending can offer. Couple that with the excitement of the high returns, and only a handful of investors will spend enough time to conduct proper research on peer-to-peer lending.
With crowdlending, it is hard to clearly point out the risks.
But as an investor, the most logical question to always ask is what happens if Platform X goes bust? What is the likelihood of that happening? How can I cover my assets against that?
The best way to go about deciding the amount you should invest in a P2P lending platform is to create an Investment Policy Statement (IPS), which will be your framework for making wise decisions without involving emotions.
So how much should you really invest in a crowdlending platform?
There is no written-on-the-wall law that we should invest not more than X amount in P2P lending, but you can start by doing the following:
- Avoid investing all your money
- If you have an emergency fund, don’t invest it in P2P lending
- Avoid borrowing money to invest in crowdlending
- Avoid investing amount you can’t afford to lose
Avoiding the above will put you on the right path to understanding how much money you should invest in crowdlending.
The next step is exploring the entire investment pie available for you including other forms of investments such as crypto, bonds, real estate, stocks, and others. The idea behind this is to have balanced portfolios that include bonds, sticks, and P2P, with P2P lending forming the larger part of the portfolio.
So, how much is too much?
The answer to this question depends on how much you can afford to lose.
With that in mind, depending on your risk profile, you should invest between 5% and 15% P2P lending of the entire portfolio, with 5% being for the low risk-taker, 10% for the medium risk-taker, and 15% for the high risk-taker.
Final Thoughts
Investing is something that, while everyone is exposed to information, depends entirely on your decision-making and sense of judgment. What works for me might not necessarily work for you. So what is shared in this post is just an opinion, which as you know, everyone has them. However, that is not to say that following exactly what we have shared here will not bear you fruits.
The key is to understand yourself better and establish your risk appetite, and then formulate an investment strategy that suits you.