Two of the most frequent questions that I get from people in the crypto community are: what do you invest in and what are the best investing strategies? As a general rule, the best investment strategy focuses on maximizing gains while minimizing risk.
Historically, the best assets that fit this profile have been stocks, bonds, and real estate. A well balanced portfolio should have an allocation of all three, which is where I am most heavily invested.
Every investment strategy should always have a long-term horizon and investors that begin putting money away in their 20s have an exponential advantage over those who begin to save later. Furthermore, investing money that is not needed to cover expenses and leaving it in the market for as long as possible is the primary method for accruing wealth faster than any other single strategy. Ultimately, this is the secret to getting rich!
To show how this works in reality, let's take a look at an easily achievable scenario. If a person invests $250 a month at an 8 percent average annual investment return the following retirement outcomes are achieved.
A person starting at age:
— 25 will accumulate $878,570 by age 65.
— 35 will accumulate $375,073 by age 65.
— 45 will accumulate $148,236 by age 65.
As you can see, an investor who begins putting money away at 25 will end up with roughly 7 times as much money at age 65 as an investor who begins at 45. This is a result of compound interest and the key to successful long term investing.
Long-term versus short-term investing
There is a significant difference between long-term and short-term investing. A lot of people, particularly millennials, don’t invest in stocks because they are afraid of losing money in the short term. If one is investing for the long term, then there is very little risk in legacy markets. Stocks can go down, but over any 10 year period in history they are always up at least 7% per year when the gains and losses are averaged out. With a longer term horizon, stocks have literally never been a bad investment.
Personally, outside of my assets (house, cars, collectibles and art), I keep 60% of my capital in index funds like Vanguard and the SPDR S&P 500 Trust. The other 20% is in individual stocks like Amazon, Apple and other large cap companies. The remaining 10% is invested in physical real estate and Real Estate Investment Trusts (REITS). I also have 10% of my funds in cryptocurrency.
I invest as much as possible in tax shelters like Roth and SEP IRAs to avoid paying taxes on the gains and to increase the amount that is compounding. I also trade commission-free on E-Trade and try to only invest in index funds that have the lowest possible fees. I also dollar cost average in each investment, meaning that I buy most of these investments on a fixed date, with a fixed amount regardless of price.
So where does crypto fit into an investor’s profile?
As a 42 year old with children and an expensive life, I am only comfortable allocating 10% or less of my net worth into cryptocurrency. A more risk averse investor would probably limit that to less than 5% and it’s likely that many in my age group would not be willing to put more than 1% to 2% of their money into such a risky asset class.
That said, most of the people investing in cryptocurrency are millennials and can tolerate far more risk than the me. I lost everything more than once in my 20s and was able to recover. For a younger investor that is passionate about the crypto space, a larger allocation of 25% could be justifiable. Obviously, one should never be all in on any asset or asset class.
So how does one actively invest in markets and maximize their potential earnings?
Compound, compound, compound!
As Albert Einstein once said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't pays it.”
The world’s most famous scientist issued this comment about compound interest and time has shown that Einstein was correct. As defined by Investopedia, “Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest each period.”
As mentioned earlier, compounding one’s gains is the key to accumulating wealth, period.
There are three key rules to maximize the advantages of compounding:
— Reinvest dividends or interest into the asset.
— Add more to the investment whenever possible.
— Invest over a long period, the younger one starts, the more powerful compounding will be.
Compounding cryptocurrency investments is far more challenging than in legacy markets. However, there are tools that I personally use to make my money work for me in both places.
My favorite tool for passively investing in legacy markets is Acorns. Even though I have accumulated wealth, I still use this tool to help get more money into the market. As described on their site, “Acorns automatically invests your spare change and lets you invest as little as $5 any time or on a recurring basis into a portfolio of ETFs.” This is a fantastic way for developing a diversified portfolio and the platform invests in more than 7,000 stocks and bonds. Acorns also auto rebalances the portfolio to stay within reasonable target allocations.
Acorns does the hard work of managing users’ portfolios based on their investing goals. Furthermore, the money that users invest is rounded up from their bank account transactions and credit card purchases, so it’s generally manageable and goes unnoticed. Personally, I use the 10x option to increase my investment.
Think of this platform as the Acorns of crypto. Similar to their legacy market cousin, RoundlyX rounds up everyday credit card and bank transactions and invests them in cryptocurrencies. At present, users can choose from a number of options, which is effectively anything traded on Coinbase. The company is seeking additional offerings with lower fees to help maximize customer gains.
RoundlyX does not provide custody for assets, they simply facilitate the transaction through Coinbase. This is a brilliant platform and I use the 10x option. I should add that this platform is my primary tool for dollar cost averaging into Bitcoin.
BlockFi allows cryptocurrency investors to earn interest on their Bitcoin (BTC), Ether (ETH), and Gemini dollars (GUSD). This is where compounding gains come into play. The company offers up to 6.2% annual interest on Bitcoin balances smaller than 5 BTC and up to 8.6% on other digital assets.
Platform users also receive interest on their principal and interest. Over the long term, this will result in satisfying exponential gains. For Bitcoin holders, this is a great way to grow the total investment while waiting for Bitcoin to reach a desired target price.
Voyager is an incredible exchange with a futuristic iOS app that offers US compliant commission-free trading on 20 tokens. Reducing commissions and fees is key to growing wealth and Voyager solves this problem by providing an easy to use interface to boot.
What’s the bottom line?
Invest early and often! This is the true key to investing success. Also seek low fee investments and exchanges that waive commissions. Take advantage of tax shelters like 401Ks and IRAs. Put your money to work for you and don’t touch it unless you absolutely need it!
When you are young you can invest in almost any asset as younger investors should keep the long time-horizon in mind. Following these strategies is the surest way to leave you sitting financially pretty and you’ll have a nice stack when you need your money the most!