Portfolio Management In Times of Uncertainty
Last week the stock market finally recognized the potential threat of the coronavirus. This is not to say that doom and gloom scenarios will actually happen. The stock market does not work that way. It factors in the possibility of events occurring, sort of like a massive multi-variable expected value equation.
What does this mean for peer to peer loan investors? Well, the obvious implication is that every dollar invested in loans is a dollar that is not losing significant value in the stock market. And, not only is it not losing value, it is still growing. Even with a relatively small portion of your portfolio invested in loans, the overall impact to your portfolio can be significant. Loan investors are usually savvy enough to understand the benefits of diversification, and we are definitely seeing a clear example of that.
One potential negative to note is that coronavirus may trigger a global recession. The impact of a recession to peer lending is not known for sure, but it is likely to result in a higher default rate. Of course, we are long overdue for a recession so this event may have simply moved that recession a little closer than it otherwise would have been. Some investors may choose to reduce risk in their loan portfolios by selecting higher grade loans. Of course, it is difficult to significantly change the risk level of a loan portfolio in a short period of time, but if you are shifting money from stock funds to loans then you may be able to do so.
The bottom line is that investors should always be evaluating their investment choices based on a variety of factors, including short and long term economic outlooks, tax implications, and the possibility of unexpected events and natural disasters.