I have posted twice in the last week about ways one could use Fibonacci when lending on Prosper: Prosper Diversification using Fibonacci to diversify by credit grades and Start Investing P2P Lending using Fibonacci to guide how quickly you move you money onto Prosper.

To be clear I am not suggesting that using Fibonacci in these circumstances is perfect or the only way, but it does seem reasonable.  I find that Fibonacci and the related golden ratio are often useful in deriving heuristics to attack large problems (NP and NP complete). 

I guess what I am wondering is how else might one use Fibonacci or the Golden Ratio to guide  decisions on Prosper.  To that end I am throwing this one out to my readers.  Nothing is out of bounds as long as you use Fibonacci / Golden Ratio and Prosper.

Please leave a comment.  The best responses will be guest posts in the future.

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Diversification is essential to success on Prosper.  There are many kinds of diversification: multiple loans, geographic, loan use…  While the most important kind of diversification is accomplished via as many as loans as possible (no more than 2% of your portfolio in a single loan), the type of diversification that often gets over looked is credit grade diversification.

On Prosper borrowers can have a ScoreXPlus score of 520-800.  The higher end is safer, it also offers reduced rates.  Conversely, the lower end of the spectrum is very risky and offers high rates.  By mixing your credit grades you can achieve greater return with reduced risk.

At the moment I am only comfortable (I believe they are profitable) with the credit grades AA-D (no E, no HR). 

One could either choose a straight line diversification (similar to mine only I am AA-C straight line with some D) or some kind of weighted diversification.

I think everyone understands straight line diversification…  You put equal portions of your portfolio into each credit grade.  This achieves an equal blend of both the risk and rate from each credit grade. 

If you are more risk averse you might choose an unequal weighting towards the higher credit grades.  One way to do this would be to use a Fibonacci sequence. 

Fibonacci starts: 1, 1, 2, 3, 5.  Applied to our example, the loan by credit grade proportions are 1D to 1C to 2B to 3A to 5AA.  A portfolio weighted in such a manner would be less risky than the previous example and still provide higher rates.

What do you think? How else might you weight the portfolio?

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I have been investing in p2p lending on Prosper since July 06. I consider it an alternative asset class and orthgonal to the stock market.  I am regularly asked if someone should invest in p2p lending… I think the answer is a loud and clear yes!

But before you rush off and invest your entire allocation of p2p lending funds in one fell swoop, head a word of caution.  20+% returns are not possible.  Scale back your expectations. 8-12% is attainable.  High risk means high risk — avoid high risk.

Also start lending money on p2p networks slowly. Get a feel for the process before committing large sums.

For example you could use a fibonacci sequence to scale up your commitment.  Fibonacci starts: 1, 1, 2, 3, 5, 8, 13, 21.  This could translate into a $50 transfer into a p2p network to start.  A second $50 transfer; then a $100 transfer, $150 transfer, $250 transfer, $400 transfer, a $650 transfer, and a $1050 transfer.  Depending on how often you are transferring funds and how large a commitment you want to make you could adjust the size of the initial transfer.

By taking your time to get started you are giving yourself a margin of error in your initial investments.  Getting your feet wet if you will.

Everyone makes mistakes.  The trick is to limit your mistakes to small amounts. 

P2P lending is the future.  Banks make too much money.

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