You may have heard the analogy “don’t put all your eggs in one basket” – well when it comes to investing on Mintos, the same principle applies!
Diversification is a widely regarded investment strategy that aims to achieve investment goals while minimizing risk. By spreading risk across multiple investments with different characteristics, your successful investments should ideally outweigh your not-so-successful investments.
On Mintos, we’ve seen that investors with highly diversified portfolios tend to achieve more stable returns on average. So to ensure you have the best chance of meeting your investment goals, we’ve put together some guidelines on how you can diversify your Mintos portfolio.
Mintos returns based on level of diversification
How to diversify using Mintos investment strategies
We’ve created various strategies to suit all types of investors. So no matter your investment preferences, it’s easy to create a diversified investment portfolio on Mintos.
Custom automated strategies and manual investing
With our custom automated strategies, you control the investment settings then the strategy automatically invests on your behalf. You can choose from more than 15 different investing criteria, such as currency, country, lending company, or loan type – providing plenty of opportunities for portfolio diversification.
Whereas, if you’d like to be more actively involved, our manual investing option gives you complete control, where you pick and make loan investments on an individual basis.
Because there isn’t one way to achieve diversification when investing on Mintos, we’ve outlined some key investing criteria to consider when creating your strategies.
Diversification across lending companies
When it comes to choosing a lending company, you’ve got plenty of options on Mintos! The more lending companies you include in your investment portfolio, the less volatile it becomes. This is because the markets of each lending company vary a lot, so it’s unlikely that a default of one lending company would affect the performance of other lending companies.
Each lending company offers different loan types, return rates, maturities, geographies, currencies, and more. Plus, they each have portfolio sizes and stages of business growth.
By choosing smaller loan investments from a higher number of lending companies, you spread your exposure to the risk of a lending company failing to meet its contractual obligations because of financial difficulties.
Mintos also has several layers of protection to help mitigate these risks. For instance, 99% of loan investments come with a buyback obligation, which means if a loan repayment is more than 60 days late, the lending company is obliged to buy back the loan and pay you the outstanding principal and accrued interest.
Also, to help with your due diligence, there’s the Mintos Risk Score, a numerical value from 10 (low risk) to 1 (high risk) given to each investment opportunity that represents its level of risk on Mintos. Depending on your risk appetite, you can also use this guide to diversify your portfolio across multiple risk types.
Diversification across loan types
Lending companies on Mintos offer loans backed by various loan types which span multiple borrower markets, such as:
Diversifying across loan types helps to spread risks associated with certain borrower segments. Borrowers from each segment have different profiles; for instance, borrowers of short-term loans can have more volatile financial situations than borrowers of mortgage loans. In this case, recessions or unemployment would affect their repayment ability differently. Therefore, investing in multiple loan types can help to decrease the overall volatility of your portfolio.
Invoice financing and business loans offer yet another level of diversification because these are loan-based investments in companies instead of private individuals. On the Mintos statistics page, you can see a breakdown of loan types by lending company with their typical past performance.
Diversification across loan maturities
By balancing investments between short-term and longer-term loans, you can reduce exposure to short-term market risk. Significant market changes (for example, the Covid-19 pandemic) are likely to affect your short-term investments more than your long-term. For instance, short-term loans tend to be unsecured and are repaid within a few months, compared to mortgage loans which are secured and repaid over longer periods. Also, by choosing loans with a variety of different maturities, you’re more likely to smooth out any fluctuations in interest rates over time.
In general, it’s helpful to have a long-term view when investing as longer-term investments are more likely to overcome any unfavorable changes in the market.
Diversification across geographies
On Mintos there are loan investments from lending companies across 34 countries, and the market for loans varies depending on a country’s economic situation. Choosing loans issued in different countries spreads your exposure to country-specific risks such as politics, financial stability, and employment rates. Economies of countries around the world are constantly changing, but changes between countries are often unrelated. Because of this, investing across various geographies can be an effective way to increase portfolio diversification.
Not only does geographical diversification spread risk, but it also increases your opportunities for returns compared to loan-based investments from a single country. With exposure to many geographies, you benefit when the economies of different countries are performing well.
Mintos investing criteria
As you can probably see, there isn’t just one way to create the perfect diversified portfolio on Mintos. So to help guide you, we’ve put together diversification criteria based on best practice investing principles and historical Mintos data.
Setting the diversification rate on your strategies
Once you’ve decided how to diversify your portfolio, we have a tool that diversifies loan investments across lending companies if you’re using custom automated strategies. The diversification rate allocates how many loan-based investments your strategy will invest in from particular lending companies, acting as a maximum allocation limit. This rate is automatically set to default but can be changed to equal or manual.
The default setting uses Mintos’ algorithm to diversify investments across loans issued by the lending companies you’ve already selected as part of your strategy. This option provides effective diversification as it reduces concentration risk while considering your investment criteria and the current market situation.
All lending companies you’ve selected will be assigned the same maximum allocation percentage if you choose the equal rate. For example, if a strategy invests in loan-based investments from 10 lending companies, each will be allocated a ~10% diversification rate.
The manual diversification rate lets you manually assign the maximum allocation for each lending company in your strategy. However, when setting diversification manually, we recommend considering our suggested diversification criteria to avoid allocating too much of your portfolio to lending companies that may not have enough loan supply at the time.
Mintos pre-made strategies
If you prefer the “set up and leave” approach, Mintos has curated three pre-made investment strategies (based on investor feedback) where the algorithms do the investing work for you. All of these strategies are created to achieve effective portfolio diversification.
For example, our Diversified strategy aims to achieve a high level of diversification by spreading risk across a wide variety of loan-based investments – limiting exposure to the risks we’ve mentioned in this article. At a high level, it:
- Invests across loans from all lending companies
- Has an algorithm that prioritizes diversification
- Has maximum 15% exposure per lending company
- Invests in loans with and without a buyback obligation
What’s your score? Our tool for measuring diversification
Once you’ve implemented your diversification strategy, we have a tool that can help you evaluate your portfolio’s level of diversification – the Mintos Diversification Score.
Because there isn’t one perfect solution for creating a diversified portfolio, the score considers the same best practice investing guidelines and data as the diversification criteria above.
Mintos Diversification Score ratings
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Predicting which investments will perform the best can be tricky, so it’s best to have broad exposure within the loans asset class. Long-term consistency in returns increases the more you diversify across the variables we’ve mentioned. For more, check out our page on the relationship between diversification and returns on Mintos.