My investment strategy consists broadly in finding a balance between maximizing profits and minimizing risks. It can be divided into 10 principles or rules:
- Know and understand the risks. Both crowdfunding as crowdlending are alternative investments with great potential profitability but not without risks, like any investment. It is important to be aware of these risks to knowingly accept them. On the one hand, there is the risk of possible delays or defaults on one or more loans or projects on which we have invested. In some cases we can mitigate this risk by investing only in loans with a repurchase guarantee (Buyback). Even if we invest only on loans with Buyback, there is still the risk of bankruptcy by one of the originators (issuers of credit) of a platform, or even the platform itself. To minimize or mitigate risks, there are a number of strategies, almost all based on a careful selection and diversification.
- Depth study of the platforms of interest in which to invest, its operation, its economic balance and viability, if they fit our profile and needs (time, repurchase guarantees, liquidity), opinions of blogs and other sources of firsthand user testimonials. The idea is that this blog will facilitate this step, using the Comparator, my technical analysis of each platform, and the monthly analysis of my portfolio. In any case, it is always advisable to do some research on your own.
- Select each investment: Once decided in which platforms to invest, it is important to select each investment carefully, checking the information provided by the platform, as well as other external factors in some cases (such as overheating of real estate prices in a given location). For multiple investments with little amount each, it is crucial to analyze in depth the criteria of your AutoInvest, investing whatever it takes to understand how each parameter works and what it means. It is advisable to test the AutoInvest investing a low amount first to ensure that it behaves as expected.
- Diversify at all levels so that if any of the loans, originators or platforms fails, the rest will compensate the losses. Diversification can and should be applied at various levels:
- Various types of investment: Do not invest all funds in participatory investments, but also in the stock market, investment funds of various types and real estate assets. Minimize the cash that offers no profitability, but is also critical to maintain sufficient liquidity to meet both regular and incidental expenses.
- Several platforms covering the different types of investment, i.e. Real Estate Crowdfunding platforms and P2P Crowdlending platforms and P2B, as well as geographical coverage. Do not limit yourself to platforms of your own country. In my case, I also invest a small percentage in currencies other than EUR.
- Combine short-term investments with other longer term ones. The duration of projects may range from less than a month to more than five years. A short-term portfolio is more liquid, but has higher risk of Cash Drag. In addition, there is a high risk that return rates will decrease in the future, as more investors compete for the same loans. Investment in projects with longer maturity reduces this risk of Cash Drag while guaranteeing the future performance. In terms of the number of originators, the Marketplaces with several originators offer a clear advantage. On platforms with a single originator, best not to invest a large proportion of your crowdlending portfolio.
- Maximize the number of projects on each platform: Most platforms advise to invest in a minimum of 50 different projects, but the more the merrier. In addition, better 100 projects/loans of 10 EUR each than 10 of 100 EUR. I usually invest around the minimum amount allowed by each platform (usually always the same amount) in the largest number of loans/projects possible, making sure also that they are diversified by originator. Mintos for example allows to diversify automatically by originator when using AutoInvest.
- Take advantage of the bonuses and promotions: Many platforms offer bonuses when signing up. These are usually fixed amounts or a percentage of the investment (typically 0.5-1%). They can be a good way to increase return rates from the beginning. Several platforms also offer temporary offers during certain periods, by investing in specific types of projects or for investments exceeding a certain amount. It is important to be alert to these, because they can give a considerable push to the profitability. You can access an updated table with all the welcome promotions and links here.
- Use secondary markets. The secondary markets may be useful in the following circumstances: 1) a good way to build up quickly a diversified portfolio (when there is a limited supply in the primary market); 2) may provide liquidity (making disinvestments) when there is a need for cash; and 3) in some platforms (Housers or Mintos), the secondary market sometimes offers discounted loans (an extra profitability). It is important to first check the payment history of a loan before buying, avoiding loans that have been delinquent in the past.
- Choose projects with Buyback. When using P2P Crowdlending platforms, personally I always prefer to invest in loans with Buyback (Buyback guarantee), more than anything for my peace of mind. Although I have invested in a couple of platforms without Buyback that offer higher returns which compensate for the defaults, often exceeding the performance of platforms with Buyback, this extra profitability, at least in my case, doesn't always compensate for the uncertainty. In the case of Real Estate Crowdfunding platforms or P2B crowdlending, loans must be guaranteed, either by real estate or other assets or collateral.
- Regular and frequent monitoring. Although tools for AutoInvest are really helpful to minimize the time spent managing our portfolio, it is important to monitor each account on a regular basis to ensure that the performances obtained are consistent with our expectations. To do this, it is useful to subscribe to receive emails with the account status on a regular basis (weekly or even daily), which will save us from having to log into each platform. So we can avoid or at least minimize the Cash Drag (cash without investing) and maximize yields. It is advisable to review and change as often as necessary our AutoInvest criteria, seeking the balance between projects with the most attractive rates, while avoiding Cash Drag and maintain a reasonable diversification. It is also useful to make sure that we are getting competitive interest rates in relation to other platforms or investment modalities.
- Monthly thorough analysis. Once a month, it is advisable to compute the returns we are getting and ensure that our expectations are being met. The analysis can be more or less thorough, but an Excel sheet is the only tool we need. Most platforms provide all the necessary parameters to avoid having do too many calculations: last month's profitability, defaults and delays, Cash Drag, etc. Once the calculations for the month have been made, it is time to decide on the strategy for the following month: new investments and divestments. In my case, for example, some platforms are (for now) over-represented in my portfolio, either because I started investing in them before, or because being more active, they have allowed me to invest important amounts more quickly. My strategy is to gradually level them.
- Strategy by type of investment. In general, in the platforms for P2P crowdlending, I invest significant amounts from the beginning because these platforms can absorb and diversify high amounts of capital in a few days. For Real Estate Crowdfunding platforms or P2B crowdlendingsince they offer fewer projects, my strategy is to increase my positions gradually investing in each new project available. On all platforms, I invest near the minimum amounts allowed per project to maximize diversification.
The time required to achieve the maximum profitability of a platform depends on the type of investment. Investments in P2B crowdlending and Real Estate Crowdfunding platforms are longer term and in some cases offer no benefits until the property is sold or the project is completed, which may involve over a year. This results in a long period (several months or even more than one year) to reach the maximum profitability of the platform. At the opposite extreme is the P2P crowdlending , which generates interest from the first month. The graph shows the progression of return rates over time to achieve the maximum profitability for each type of participatory investment: a couple of months for peer-to-peer loans, 9-10 months for business loans, and a year or more for Real Estate Crowdfunding platforms. The graph is based on my performance.