Diversification. Plain and simple. That’s why people are investing in cryptocurrency.
Kent Insley, chief investment officer at Tiedemann Advisors in New York City, said that compounding returns is the key to growing wealth in a portfolio over time, along with avoiding large losses.
An investment that declines in value by 50% must appreciate by 100% to recoup its original value.
Any type of investment can fluctuate or suffer losses that is why it is important to invest on sources that are not correlated to each other.
When one investment goes down, others will keep you secure.
For example, if stocks tanked 30%, your Bitcoin investment would keep your portfolio from falling as deep.
- minimizes the risk of loss,
- offers you more opportunities to earn,
- protects you against adverse market cycles, and
- reduces volatility.
It’s the age-old adage, never keep all your eggs in one basket. If you put your money only in one investment, you will lose everything if that investment goes bad.
There is also the concept of opportunity cost.
It simply means you automatically lose out on opportunities that could earn money if you don’t invest in it.
I know. It is tempting to not diversify when one of your investments is doing so well.
But part of being an investor is planning for the future and anticipating different scenarios.
And you need to know, just based on history and practicality, that the most profitable investment today can tank tomorrow.
The best investors or financial advisors out there know the only way to avoid it is by diversification.
I know it can sound scary and intimidating.
For decades, we were all made to believe that we need financial advisors or business managers to advise us on where to put our money.
That is simply not true.
The trick to diversifying your portfolio is owning investments that are not correlated and play different parts.
Think about diversification as building a basketball team.
A team of only shooters – even if they are the best shooters – won’t do you much good in a game.
To have a well-rounded team, you need guards, center, coaches, and others.
Your portfolio is no different.
Each investment in your portfolio should serve a different function.
Stocks may be your power forward or shooting guard.
Gold, silver, and other metals is your strongest line of defense.
Cryptocurrency is your rookie but could potentially be a franchise player.
And like a rookie, it’s showing great promise now but nothing is certain. As it gains ‘experience’, it will make huge mistakes. It could get sidelined for several games and it won’t until much later will you actually see the fulfillment of your potential.
Whether or not you have the tolerance to wait and the emotional stability to see its up and downs, that’s for you to decide.