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How Much Diversification is Enough?

by Peter Renton on July 22, 2011

Lending Club diversification of investor notes

On Lending Club’s home page they talk about the 800 Club (as you can see in the graphic above) – those investors with 800 or more different notes. They proudly state that no investor with at least 800 notes in their portfolio has lost money.

Prosper makes no such claims but because of the way they record their loan and investor data we can actually work this out for ourselves. I fired up Lendstats and ran an analysis on every investor to see the impact of diversification on ROI. Keep in mind that these numbers are only for Prosper 2.0 loans – only investor results for loans invested in from July 2009. The table below shows the results.

Number of NotesWorst ROIBest ROIMedian ROINumber of investors

Not surprisingly, if you invest in just a handful of loans you can get wildly different ROIs. But what is most interesting to me about this chart is that the worst ROI gets consistently better the more loans you have. Once you get to 500 loans every investor on Prosper is making money. In fact, the second worst ROI (after the 1.1%) is 4.7%.

It Takes 500 Notes to Be Fully Diversified

When investing with Prosper if you have 500 notes it doesn’t matter what criteria you use you will likely generate a positive ROI. You have the law of large numbers working for you – this negates the impact of bad luck and bad choices.

Of course, for many investors having 500 notes is just a dream. With a $25 minimum you need at least $12,500 to have a portfolio with that many notes and this will be beyond many people. Even so, this is something you should work towards. As you can see the more notes you have the less likely you are to have a negative ROI.

Large Investors Take Note

Once you get to 750 notes I would say there is no need to diversify any more. While there may be a small advantage in having 1,500 notes over 750 notes it is not big enough to warrant the extra effort in my opinion. What I would do after you get to 500 notes is start increasing your note size. I would reinvest at $50 per note and if you add new money do the same.

Which brings me to my final point. If you are intending to put a large amount of money to work I say there is no need to aim for an initial portfolio of more than 500 notes. So if you invest $100,000 then you could allocate $200 per note quite comfortably.

What do you think? Is 500 notes the magic number? Please share your thoughts in the comments.


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{ 19 comments… read them below or add one }

Jeff July 22, 2011 at 11:32 am

My thoughts… As LendingClub continues to tweak underwriting and the economy improves it may take even less than 500 notes as you’ve discovered here. The lower the better for people sitting on the fence about P2P lending.


Mikael R July 22, 2011 at 12:25 pm

Dear Peter,

Great Post. I ran a similar analysis for Peerform investors a few weeks ago and my computation resulted in slightly different figures. I only used Lending Club statistics as I was interested to analyze notes coming from “Prime Borrowers”. Are you able to separate the data from Prosper and LC and publish the numbers? I would be interested to see if our figures converge.




Bilgefisher July 22, 2011 at 12:54 pm

Only one item I would add to your article, liquidity. Selling larger notes on folio is likely more difficult (obviously $50 isn’t large, but $200 might be for many bidders). Time vs liquidity vs diversification.

What is also interesting is the number of lenders with less than 50 notes. Currently the post relaunch lender field exceeds 20k. (In fact they just went over 20k lenders this week based on my observations through lendstats.) That means over 1/2 of all lenders have less than 50 notes. They should expect wide variation in results.

The average age of loans will also have an effect on long term ROI. If a lender has 50 notes all 1-2 month old with several defaults, s/he has a very negative ROI. As other notes pay up over time, they could very easily have a long term positive return.



Peter Renton July 22, 2011 at 2:15 pm

@Jeff, I think smart investors can be well diversified with 250 notes or even less. But EVERY investor is fully diversified at 500 notes. It would be ideal if we could bring that number down to 100 notes, but I don’t see that happening any time soon. Maybe if the economy continues to improve that will help.

@Mikael, With the Lending Club data they don’t provide any investor information in their download so you can only do a hypothetical analysis of individual investor return. Prosper provides data that matches each investor with actual notes so you can estimate a real return for every investor account. So in answer to your question we can’t do an apples to apples comparison with the publicly available data.

@Bilgefisher, Excellent point about the larger notes. I have found from personal experience that notes of $200 or more are much harder to sell on Foliofn than the $25 or $50 notes. I have noticed that was well that the vast majority of lenders on Prosper have less than 50 notes. I feel bad for these people in a way because they are “giving p2p lending a go” but have a much higher chance of having a negative experience given how small their portfolios are.

True that the average age of the notes will have an impact on estimated ROI. Lendstats may report a negative ROI based on a couple of late loans but by the end of the year this same investor may end up with a 10% actual ROI if some of those late loans come back to current.


Mikael R July 22, 2011 at 2:24 pm

This is correct, but you can simulate an investor’s portfolio using LC Data: By taking on for every single loan: Total Amount Funded, Remaining Principal, Interest Paid and Loan Status (Defaulted/Charged off or Current). That should create a database of approx 30,000 loans. Then you can create some kind of script that automatically creates 1,000 simulations of 10, 20, 50, 100 and 500 notes and see the distribution of Defaults and ROI.


Peter Renton July 22, 2011 at 2:34 pm

@Mikael, I can see that would give an excellent indication of the comparison between numbers of notes. It would, however, be slightly different from actual investor returns because people don’t invest randomly. I would be interested in seeing your analysis if you are open to sharing it.


Mikael R July 22, 2011 at 2:46 pm

I believe that most investors do with the “portfolio builder” tool. Let’s connect next week and I will send you my work.


KenL July 22, 2011 at 8:32 pm

I have one problem with all the talk of diversifying. Someone with 500 or more notes does not necessarily have good returns because of the large number of notes. I think in many cases the causality is the other way around. A person invests in so many notes because he or she is already getting good returns. People who are getting bad returns stop investing before ever getting to 500 notes invested.


Peter Renton July 23, 2011 at 6:07 am

@Mikael, Thanks, will do.

@Ken, You bring up a valid point. There is a chicken and egg kind of problem here. Few investors start out with a large chuck of money to invest – I think I remember reading somewhere that at Lending Club the average new investor amount is in the order of $9,000 (this is likely skewed high by some very large investors).

So the question I have for you is this – at what point would you consider a portfolio well diversified?


KenL July 23, 2011 at 12:49 pm

I think 300 is very well diversified.


Dan B July 23, 2011 at 4:00 pm

I seriously doubt that the average NEW investor at LC is $9000……………considering that the average investor’s balance at LC is only $8640.


Charlie H July 24, 2011 at 10:25 am

Based on the min amount for LC Prime Accounts being $5,000 Lending Club must believe that 200 notes is the minimium notes required for them to show the client a positive ROI.


Peter Renton July 24, 2011 at 1:50 pm

@Dan, No doubt I have overstated it here – I was reciting that number from memory and it is probably a bit off. Thanks for your clarification.

@Charlie, I hadn’t thought about PRIME accounts but that 200 number may well be what Lending Club considers to be a minimum for good diversification.


Brian B July 24, 2011 at 5:06 pm

I don’t think the $5000 limit for Prime has anything to do with diversification. They only charge .8% in order for them to do all the work. On $5000 that is only $40. Already not much money – but think if you only invested $500 and wanted Prime service, they would be doing all the work for only $4. Even if the system is fully automated, that hardly pays for the electricity their computer uses while it makes the picks and sends you the emails. Let alone any human interaction you require. It’s just not worth their time and effort for so little.

(and I’d also reckon that they consider the exclusivity a bit of a selling point also. Maybe somebody was going to invest $2500…but ooh, I have to invest $5k then I can get a ‘prime’ account…that sounds special and I wanna be special…ok i’ll invest more money)


Peter Renton July 25, 2011 at 9:17 am

@Brian, While the $5,000 may not have anything directly to do with diversification I think Lending Club would hardly offer PRIME accounts at that level if they felt the accounts were not sufficiently diversified. The other advantage that PRIME accounts have for Lending Club is that they are “sticky”. By that I mean the account is always reinvesting cash automatically. It takes action from the investor to stop this happening. So I imagine there are far fewer defections with PRIME accounts.


MikeE August 10, 2011 at 4:42 pm

I did an analysis similar to what Mikael R suggested and published it at

I used only loans that had reached full term. So this is based on actual loan performance and not an estimate.

The simulation showed that any random portfolio with at least 200 loans would have positive net return.


Peter Renton August 15, 2011 at 12:42 pm

@MikeE, Very interesting. I didn’t realize the number of loans was that low. This is encouraging. And underwriting has improved a lot in the last couple of years so I would guess the numbers would be even better with the current batch of loans on the platform.


RAS May 31, 2012 at 10:59 am

is there such a thing as “Too Much” diversification in an acct at LC or Prosper?

ie–is 2000 loans too many?


Peter Renton June 1, 2012 at 3:27 pm

I don’t think 2,000 loans is too many, particularly when you consider that right now there are over 45,000 loans outstanding on LC and over 20,000 loans on Prosper so you are looking at a small percentage of the total loans. The only thing to keep in mind is that if you have a very large number of loans it is more difficult to get an above average return because your account will begin to reflect the averages.


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