Well, quite simply, it uses your existing deposits (or starting amount if you are a new investor) plus your planned future deposits and the reinvestment of cash flow from the borrowers’ monthly loan payments. We know that there is a probability of loans in your portfolio defaulting, so the expected rate of return is usually significantly less than the weighted average interest rate of the total portfolio. We identify the probability of defaults in your portfolio based on your current and previous risk strategy along with the distribution of credit ratings.
Investing with Bondora should be viewed as a long term investment (5+ years). For those who choose not to reinvest their incoming cash flow and invest for shorter durations, it is likely you will see a lower absolute return than those with forward-looking investment goals. Why? Your funds have less time to earn the rewards from compound interest, which essentially means the interest you earn from investing earns you even more interest and grows your portfolio significantly.
For any investors who are familiar with excel or SQL, you can download the formulas we use here and try it out for yourself.
Why is this important for investors?
By using our Portfolio Manager Slider and calculator, you can get a forecast of what your expected rate of return will be over the duration you choose and most importantly, an estimate of what your portfolio size will be. This can be especially useful if you are investing for a specific goal, such as paying a large chunk off your mortgage or saving for your children’s university costs.