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Safety in Numbers: Diversification of liwwa portfolios

Investors are constantly told to diversify. Perhaps no investment advice is more ubiquitous than the admonition not to put all of one’s eggs in one basket. But what does diversification look like? How can we measure it, and what are the consequences of neglecting it?

In 2017, we wrote a blog post explaining how diversification helps mitigate the idiosyncratic risk of investments. We showed that liwwa investors whose portfolios had a larger number of “effective loans” -- or loans adjusted for relative size -- had enjoyed more stable and predictable returns.

Today, three years later, we are happy to note that liwwa’s investors are more diversified than ever. The average liwwa investor has a portfolio of 16 effective loans, and many hold more than 50. The distribution of effective loans in liwwa portfolios is illustrated in the chart below.

Distribution of Effective Portfolio Size.png

If we plot the effective number of loans in these portfolios against their investment returns, we see a clear pattern: diversified portfolios have their returns clustered tightly around the expected long-run average, while less diversified portfolios are widely scattered.

IRR vs effective number of loans.png

Investor portfolios with fewer than 10 effective loans have relatively unpredictable returns. Overall, while this group saw high average IRRs of around 12%, the standard deviation of returns for this group was 7.5 percentage points. A small share of these undiversified portfolios -- 3.9% -- even saw negative overall returns.

By comparison, portfolios with more than 10 effective loans had about the same average IRR -- around 14% -- but much less volatility, with a standard deviation of only 2.5 percentage points. All portfolios with more than 8 effective loans saw positive returns.

This demonstrates the importance for investors of spreading their portfolios across many different assets to ensure their returns are predictable. In particular, liwwa investors should aim to have more than 10 effective loans in their portfolios to reduce the uncertainty of their returns. An even higher number would be strongly preferable.

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* The historical return range is based on the annualized Internal Rate of Return (IRR) of liwwa investors' actual portfolios, taking into account late payments, defaults, write-offs, recoveries and service fees for all loans originated since 2013. The range represents the 15th to 85th percentile of returns for investors whose accounts have been open for at least 12 months. Individual results may vary. Historical performance is no guarantee of future returns, and the historical return range is not intended as investment advice or as a guarantee of the performance of investment opportunities.

Important Note: liwwa, Inc. does not guarantee investors a return and all investments carry risk, learn more about the investment risks. All transactions enabled through liwwa.com are subject to Terms of Service and the Investor Agreement.

If at any point in the future, liwwa ceases to exist as a company, becomes insolvent, or faces any other distribution event, investors may experience delays in repayment of loans they have invested in. In this unlikely event, investors may lose a portion of or all of their invested funds.

All rights reserved. Copyright © 2022

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Give us a Call

For Borrowers: +962 79 870 4070

For Investors: +962 79 858 2253

icon-facebookicon-linkedinicon-instagramicon-twitter

* The historical return range is based on the annualized Internal Rate of Return (IRR) of liwwa investors' actual portfolios, taking into account late payments, defaults, write-offs, recoveries and service fees for all loans originated since 2013. The range represents the 15th to 85th percentile of returns for investors whose accounts have been open for at least 12 months. Individual results may vary. Historical performance is no guarantee of future returns, and the historical return range is not intended as investment advice or as a guarantee of the performance of investment opportunities.

Important Note: liwwa, Inc. does not guarantee investors a return and all investments carry risk, learn more about the investment risks. All transactions enabled through liwwa.com are subject to Terms of Service and the Investor Agreement.

If at any point in the future, liwwa ceases to exist as a company, becomes insolvent, or faces any other distribution event, investors may experience delays in repayment of loans they have invested in. In this unlikely event, investors may lose a portion of or all of their invested funds.

All rights reserved. Copyright © 2022