Most Prosper lenders do not diversify their portfolio

Diversifying your Propser loans allows you to lower the overall impact on your portfolio if one or more of your loans go into default. With 20 loans of equal amount you would have 5% invested in each loan. That means if one of your loans defaults you loose 5% of your investment. Lets assume you have an all AA portfolio and you are at 9.5% interest on your loans. One default would reduce your return to around 4.5%, and a second default could put you at a negative return. Increasing the number of loans to 50 so that you have 2% invested in each loan achieves better diversification. Under this scenario, after one default you would still be at around a 7.5% return, and close to 5.5% in the event of a second default. So, diversification is really helpful at reducing the overall risk on your portfolio. So, how many prosper lenders diversify their portfolio? Lets look at some stats:

Number of Lenders
Percentage of Lenders
Less than 20 loans
Between 20 and 50 loans
More than 50 loans

Looking at this table, less than 15% of Prosper lenders have well diversified portfolios and 70% have little or no diversification. So, why is it that Prosper lenders are not very good at diversification? Looking at some additional stats will help us answer that question.

At Prosper you are required to invest a minimum of $50 when making a bid on a Prosper loan. This means to have 20 loans you need to invest at least $1000, and to have 50 loans you need to invest a minimum of $2500. When we analyze the number of lenders by amount invested we get that 41% of lenders have less than $1000 invested. So, short of investing more money into Prosper, there is nothing that these small lenders can do to diversify their portfolio.

On the Petri Dish suggestion forums several lenders have requested that Prosper lower the bid requirements for lenders to allow them to better diversify small portfolios. Judging by the number of small lenders with no chance for diversifying their portfolios I think this would be a good idea and a welcome improvement. Zopa, a peer-to-peer lending site in Europe, allows lenders to have as little as 5 Euros invested in each loan. I think lowering the minimum bid to $10 or even $25 would be a welcome improvement.