About Us  > Blog

Complete Prosper Diversification

With the economy a bit unsteady, the importance of diversification cannot be ignored. WealthBoy wrote a great post to introduce diversification on Prosper where he observed that a lender should pick up at least 30 different loans to help spread out the risk. Whether you’re diversifying by picking up 30 or 130 loans, it’s important to not just talk the talk, but to walk the walk. If you’re going to diversify, truly diversify.

The power in diversification comes from picking up loans that succeed or fail more or less independently. This independent behavior is characterized statistically by looking at the correlation between two investments. To explore this, travel with me to Sandusky, Ohio for a minute to think through this. Tommy Boy Callahan is about to go on a sales trip to save his family’s auto parts business. If I’m a lender with 30 loans out to all the various employees of Callahan Auto, I’m taking a large risk. If Tommy fails on his trip, all the plant employees will be out of a job, and a very high percentage of my loans will go belly up. In this scenario, there’s a high correlation between one of my loans failing, and one of the other loans failing as well. A lender could have a huge number of loans to the workers, but it wouldn’t do me any good because they’re all likely to fail together. In other words, my 30 loans have only created the appearance of diversification.

To truly diversify, it’s important to distribute those eggs across multiple baskets. Spread loans across multiple states to help avoid local downturns and across different credit grades, incomes, and jobs to target different steps on the socio-economic ladder. By spreading out your lending, you can reduce correlation between loans and reap the benefits of true diversification.

Mike is a Prosper Lender and blogs about Prosper for Prosperous Land.

Leave a Comment

Prosper moderates all comments and will approve those that are directly relevant to the post. We do not publish comments that are spam, are offensive or appear to pass you off as another person.

(required) Email will not be published.

Comment Policy


To prove you're a person (not a spam script), type the security word shown in the picture. Click on the picture to hear an audio file of the word.
Click to hear an audio file of the anti-spam word

3 Responses

WealthBoy | February 1st, 2008 at 8:20 am

Well said Mike. It is all about ensuring your profits on successful loans out-pace the losses incurred from defaulting loans.

j9359 | February 2nd, 2008 at 10:17 pm

While I agree that diversification is good it will not eliminate the market risk. I also think that the number of loans needed for proper diversification is 100 or more.


posted in Lenders,Personal Finance Education 3 comments »

Connect with us



Prosper Increases Allocation to Fractional Pool

By Prosper on 07/30/15   [ 0 ]

Posted by Eric Thaller To improve the investing experience for Prosper’s community, Prosper recently made a change to its platform. Prosper started increasing the allocation of loans to the fractional pool over the last week, so that retail investors can invest more in the fractional pool faster and easier. Prosper’s CEO, Aaron Vermut, alluded to [...]

Read More

Prosper Introduces Debt Sale Program

By Prosper on 07/21/15   [ 0 ]

By Eric Thaller As part of our ongoing efforts to improve the investor experience on the Prosper platform, we are making changes to the way we deal with charged-off loans.  On July 17th, Prosper introduced a debt sale recovery strategy aimed at delivering an increased level of return for investors in a more timely manner. [...]

Read More

Prosper Opens for Business to Investors in Indiana

By Prosper on 07/13/15   [ 2 ]

Posted By Eric Thaller Today we announced that the Prosper platform is now available to investors in Indiana. With the addition of Indiana, Prosper is now open to investors in 32 states and the District of Columbia. We appreciate the work of the state regulators to bring this investment opportunity to its residents. As one [...]

Read More

« Older Entries

Monthly Archive

Notice: Blogs and other materials posted on or linked from this page that use the name "Prosper" generally use that name to refer to Prosper Marketplace, Inc. if published before January 31, 2013 and to refer to Prosper Funding LLC if published on or after February 1, 2013.