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Ask any financial advisor for general advice on how to invest your money and they'll say, "Diversify, diversify, diversify." While I'm not a fan of general advise, there is some validity to diversification. But... only as long as you're doing well within your diversification tools. Diversifying with a low yield tool is nonsense, that's just allowing your money to sit stagnantly.
A fun diversification tool that I've found to be prosperous is Prosper.com. I've been earning 9.95% with a conservative portfolio. Let me explain: Prosper.com is a "people to people lending marketplace." With the market downturn and banks adopting stricter lending practices those in need of funds have turned to this social lending site for loans. This is good news for those of us who have a little extra cash laying around and want to get more than a measly return from the same hesitant-to-loan banks.
It works like this: Prosper.com runs a credit check on each borrower and rates them on a AA, A, B, C, etc. basis. Each loan needs to be paid back to lenders within 3 years. They create a listing detailing how much they hope to borrow, their current monthly expenses proving that they can make the estimated monthly payments, some borrowers detail how the money will be spent, and Prosper sets an initial listing interest rate based on their credit rating that lenders will reverse auction down.
Lenders fund their accounts with cash they don't mind seeing in full for 3 years. You can choose a pre-set portfolio that has an estimated return or define your own parameters. Essentially, your "portfolio" is a list of borrowers you're comfortable lending to. It places your funds automatically as new, approved listings appear. For example, in my self-directed portfolio I chose to loan to borrowers that meet the following criteria: a credit rating of B or greater, a Debt to Income (DTI) ratio of 14% or less, less than 7 open credit lines, and a listing asking for $7,500 or less. I also set a minimum for each category of borrower, for example: For borrowers with an AA credit rating the lowest percent I'm willing to receive for my loan is 5%, but for B rated borrowers I'll accept nothing less than 8.5%.
Obviously the more risky the borrower, the larger the interest you will receive IF they pay the loan back in full and don't default. Prosper.com has great charts on the likelihood that each credit rating range will pay back the loan - I found it quite useful and used their research material to create my above-mentioned portfolio. I'd like to note at this point that I created a very conservative portfolio that Prosper estimated would yield around 5.41% per year, but currently I'm receiving 9.95% annually. So don't be discouraged or think that you need to loan to risky borrowers to earn a decent return on investment. Thus far there are more borrowers than lenders, therefore you've got the pick of the litter.
Prosper.com recommends that lenders only allocate $50 dollars to each borrower listing - therefore if you have $2,000 to invest you'll be funding 40 loans. This protects your funds in the event that a borrower defaults on a loan. Prosper.com offers two collections agencies to chose from and provides a record of their successes so that you can make an informed decision on who you'd like to employ. The collections process starts automatically once a borrower defaults, and if you are unsatisfied with the collections agency that you chose you can always change it.
If you find yourself in need of your funds back - you have two options. You can become a borrower on Prosper.com. Or, if you pause your portfolio, Prosper.com will stop lending on your account and as your borrowers make payments your funds will trickle back you along with gained interest. Typically a $50 loan will have around a $1.50 monthly payment back to you, so if you have 40 loans you'll be getting back about $60 a month available for transfer, not including earned interest.
I have found Prosper.com to be very lender and user friendly and have enjoyed great success even with a conservative lending portfolio - 9.95%. It is truly hard to find that kind of return currently without great risk.
